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Discounting The Global Climate When Technological Change is Endogenous

  • Gunter Stephan
  • Georg Müller-Fürstenberger
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    There are two polar views on the issue of discounting. One is to focus on intergenerational equity which means discounting utilities at low rates. Alternatively, the focus is on efficiency where the choice of the discount rate should imply rates of return that are similar to those that prevail in the capital markets. This paper analyses how different discount rates affect greenhouse gas abatement and endogenous technological change. Starting point is a simple analytical model where we show that higher discount rates cannot result in smaller stocks of atmospheric carbon. However, we cannot rule out the paradoxical result that a higher discount rate may lead to a higher knowledge stock. Therefore an Integrated Assessment Model is set up to take a closer look into the time pattern of emissions. Surprisingly, low discount rates lead to a sharp increase in emissions during the beginning of the time horizon, which, however, is overcompensated through higher efforts in greenhouse gas mitigation during the rest of the time horizon. Furthermore, at low discount rates, the potential to save energy through technological innovation is utilized faster and more pronounced than with higher discount rates.

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    File URL: http://www.vwl.unibe.ch/papers/dp/dp0603.pdf
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    Paper provided by Universitaet Bern, Departement Volkswirtschaft in its series Diskussionsschriften with number dp0603.

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    Date of creation: Mar 2006
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    Handle: RePEc:ube:dpvwib:dp0603
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    1. Reyer Gerlagh & Bob van der Zwaan & Marjan Hofkes & Ger Klaassen, 2004. "Impacts of CO 2-Taxes in an Economy with Niche Markets and Learning-by-Doing," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 28(3), pages 367-394, July.
    2. 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.
    3. Jones, Charles I, 1995. "R&D-Based Models of Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 759-84, August.
    4. Burmeister, Edwin & Turnovsky, Stephen J, 1972. "Capital Deepening Response in an Economy with Heterogeneous Capital Goods," American Economic Review, American Economic Association, vol. 62(5), pages 842-53, December.
    5. Kenneth J. Arrow, 1996. "Discounting, Morality, and Gaming," Working Papers 97004, Stanford University, Department of Economics.
    6. Dieter Bräuninger, 2003. "Demographics and Pension Reforms in the Major Central and Eastern European Countries," World Economics, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 4(1), pages 117-132, January.
    7. Tjalling C. Koopmans, 1963. "On the Concept of Optimal Economic Growth," Cowles Foundation Discussion Papers 163, Cowles Foundation for Research in Economics, Yale University.
    8. Goulder, Lawrence H. & Mathai, Koshy, 2000. "Optimal CO2 Abatement in the Presence of Induced Technological Change," Journal of Environmental Economics and Management, Elsevier, vol. 39(1), pages 1-38, January.
    9. Stephan, Gunter & Muller-Furstenberger, Georg, 1998. "Discounting and the Economic Costs of Altruism in Greenhouse Gas Abatement," Kyklos, Wiley Blackwell, vol. 51(3), pages 321-38.
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