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Modified Ramsey Discounting for Climate Change

  • Tol, Richard S. J.

The Ramsey rule for the consumption rate of discount assumes a transfer of money of a (representative) agent at one point in time to the same agent at another point in time. Climate policy (implicitly) transfers money not just over time but also between agents. I propose three alternative modifications of the Ramsey rule to account for this. Taking the Ramsey rule as given, I derive an intuitively clear but ad hoc modification. Using the assumptions underlying the Ramsey rule, I derive a consistent but more elaborate modification. If the discount rate is differentiated by victim, the consistent modified Ramsey rule is simpler and identical to regional equity weights. I apply the modified Ramsey rules to estimates of the marginal damage costs of carbon dioxide emissions. The results confirm that optimal climate policy has differentiated carbon taxes. Results also show that the standard Ramsey rule drastically underestimates the social cost of carbon.

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Paper provided by Economic and Social Research Institute (ESRI) in its series Papers with number WP368.

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Date of creation: Jan 2011
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Handle: RePEc:esr:wpaper:wp368
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  1. David Anthoff & Richard S.J. Tol, 2007. "On International Equity Weights And National Decision Making On Climate Change," Working Papers FNU-127, Research unit Sustainability and Global Change, Hamburg University, revised Feb 2007.
  2. Richard Tol, 2002. "Estimates of the Damage Costs of Climate Change, Part II. Dynamic Estimates," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 21(2), pages 135-160, February.
  3. Tol, Richard S. J., 2001. "Equitable cost-benefit analysis of climate change policies," Ecological Economics, Elsevier, vol. 36(1), pages 71-85, January.
  4. David Anthoff & Cameron Hepburn & Richard S.J. Tol, 2007. "Equity Weighting and the Marginal Damage Costs of Climate Change," Working Papers 2007.43, Fondazione Eni Enrico Mattei.
  5. William D. Nordhaus, 2007. "A Review of the Stern Review on the Economics of Climate Change," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 686-702, September.
  6. Kristen A. Sheeran, 2006. "Who Should Abate Carbon Emissions? A Note," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 35(2), pages 89-98, October.
  7. Richard Tol, 2002. "Estimates of the Damage Costs of Climate Change. Part 1: Benchmark Estimates," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 21(1), pages 47-73, January.
  8. Martin L. Weitzman, 2009. "On Modeling and Interpreting the Economics of Catastrophic Climate Change," The Review of Economics and Statistics, MIT Press, vol. 91(1), pages 1-19, February.
  9. Richard S. J. Tol, 2009. "The Economic Effects of Climate Change," Journal of Economic Perspectives, American Economic Association, vol. 23(2), pages 29-51, Spring.
  10. Nicholas Stern, 2008. "The Economics of Climate Change," American Economic Review, American Economic Association, vol. 98(2), pages 1-37, May.
  11. Fankhauser, Samuel & Tol, Richard S.J. & Pearce, David W., 1998. "Extensions and alternatives to climate change impact valuation: on the critique of IPCC Working Group III's impact estimates," Environment and Development Economics, Cambridge University Press, vol. 3(01), pages 59-81, February.
  12. David Pearce & Ben Groom & Cameron Hepburn & Phoebe Koundouri, 2003. "Valuing the Future," World Economics, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 4(2), pages 121-141, April.
  13. Marc Fleurbaey & Stéphane Zuber, 2012. "Climate policies deserve a negative discount rate," Working Papers halshs-00728193, HAL.
  14. Schelling, Thomas C, 1992. "Some Economics of Global Warming," American Economic Review, American Economic Association, vol. 82(1), pages 1-14, March.
  15. Seán Lyons & Karen Mayor & Richard S.J. Tol, 2008. "Environmental Accounts for the Republic of Ireland: 1990-2005," Papers WP223, Economic and Social Research Institute (ESRI).
  16. Frances Ruane & Xiaoheng Zhang, 2007. "Location Choices of the Pharmaceutical Industry in Europe after 1992," The Institute for International Integration Studies Discussion Paper Series iiisdp220, IIIS.
  17. Martin L. Weitzman, 2007. "A Review of the Stern Review on the Economics of Climate Change," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 703-724, September.
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