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Discounting and relative prices in assessing future environmental damages

Author

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  • Hoel, Michael

    () (Department of Economics, University of Oslo)

  • Sterner, Thomas

    () (Department of Economics, School of Business, Economics and Law, Göteborg University)

Abstract

Environmentalists are often upset at the effect of discounting costs of future environmental damage, e.g. due to climate change. An often overlooked message is that we should discount costs but also take into account the increase in the relative price of the ecosystem service endangered. The effect of discounting would thus be counteracted, and if the rate of price rise of the item was fast enough it might even be reversed. The scarcity that leads to rising relative prices for the environmental good will also have direct effects on the discount rate itself. The magnitude of these effects depends on properties of the economy’s technology and on social preferences. We develop a simple model of the economy that illustrates how changes in crucial technology and preference parameters may affect both the discount rate and the rate of change of values of environmental goods. The combined effect of discounting and the change of values of environmental goods is more likely to be low, or even negative, the lower is the growth rate of environmental quality (or the larger its decline rate) and the lower is the elasticity of substitution between environmental quality and produced goods.

Suggested Citation

  • Hoel, Michael & Sterner, Thomas, 2006. "Discounting and relative prices in assessing future environmental damages," Working Papers in Economics 199, University of Gothenburg, Department of Economics.
  • Handle: RePEc:hhs:gunwpe:0199
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    File URL: http://hdl.handle.net/2077/2722
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    References listed on IDEAS

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    1. Azar, Christian & Sterner, Thomas, 1996. "Discounting and distributional considerations in the context of global warming," Ecological Economics, Elsevier, vol. 19(2), pages 169-184, November.
    2. Weitzman Martin L., 1994. "On the Environmental Discount Rate," Journal of Environmental Economics and Management, Elsevier, vol. 26(2), pages 200-209, March.
    3. Horowitz, John K., 1996. "Environmental policy under a non-market discount rate," Ecological Economics, Elsevier, vol. 16(1), pages 73-78, January.
    4. Schelling, Thomas C, 1995. "Intergenerational discounting," Energy Policy, Elsevier, vol. 23(4-5), pages 395-401.
    5. Gerlagh, Reyer & van der Zwaan, B. C. C., 2002. "Long-Term Substitutability between Environmental and Man-Made Goods," Journal of Environmental Economics and Management, Elsevier, vol. 44(2), pages 329-345, September.
    6. Weitzman, Martin L., 1998. "Why the Far-Distant Future Should Be Discounted at Its Lowest Possible Rate," Journal of Environmental Economics and Management, Elsevier, vol. 36(3), pages 201-208, November.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Di Vita, Giuseppe, 2008. "Is the discount rate relevant in explaining the Environmental Kuznets Curve?," Journal of Policy Modeling, Elsevier, vol. 30(2), pages 191-207.
    2. Dieter Helm, 2007. "Climate change: Sustainable growth, markets, and institutions," Human Development Occasional Papers (1992-2007) HDOCPA-2007-05, Human Development Report Office (HDRO), United Nations Development Programme (UNDP).
    3. Pedro Conceição & Yanchun Zhang, 2010. "Discounting in the context of climate change economics: the policy implications of uncertainty and global asymmetries," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 12(1), pages 31-57, June.

    More about this item

    Keywords

    Discounting; future costs; scarcity; environment; climate change;

    JEL classification:

    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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