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The Behavioural Economics of Climate Change

Author

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  • Brekke, Kjell Arne

    (Department of Economics, University of Oslo)

  • Johansson-Stenman, Olof

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

Abstract

This paper attempts to bring some central insights from behavioural economics into the economics of climate change. In particular, it discusses (i) implications of prospect theory, the equity premium puzzle and time inconsistent preferences in the choice of discount rate used in climate change cost assessments, and (ii) the implications of various kinds of social preferences for the outcome of climate negotiations. Several reasons are presented for why it appears advisable to choose a substantially lower social discount rate than the average return on investments. It also seems likely that taking social preferences into account increases the possibilities of obtaining international agreements, compared to the standard model. However, there are also effects going in the opposite direction, and the importance of sanctions is emphasised.

Suggested Citation

  • Brekke, Kjell Arne & Johansson-Stenman, Olof, 2008. "The Behavioural Economics of Climate Change," Working Papers in Economics 305, University of Gothenburg, Department of Economics.
    • Handle: RePEc:hhs:gunwpe:0305
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    More about this item

    Keywords

    Behavioural economics; prospect theory; equity premium puzzle; social preferences; climate negotiations.;
    All these keywords.

    JEL classification:

    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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