Discounting and relative prices in assessing future environmental damages
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.
|Date of creation:||16 Mar 2006|
|Date of revision:|
|Publication status:||Published in Climatic Change, 2007, pages 265-280.|
|Contact details of provider:|| Postal: |
Phone: 031-773 10 00
Web page: http://www.handels.gu.se/econ/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- 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.
- Weitzman, M.L., 1993.
"On the 'Environmental' Discount Rate,"
Harvard Institute of Economic Research Working Papers
1625, Harvard - Institute of Economic Research.
- 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.
- Horowitz, John K., 1996. "Environmental policy under a non-market discount rate," Ecological Economics, Elsevier, vol. 16(1), pages 73-78, January.
- Schelling, Thomas C, 1995. "Intergenerational discounting," Energy Policy, Elsevier, vol. 23(4-5), pages 395-401.
When requesting a correction, please mention this item's handle: RePEc:hhs:gunwpe:0199. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marie Andersson)
If references are entirely missing, you can add them using this form.