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Relative prices and climate policy: How the scarcity of non-market goods drives policy evaluation

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  • Drupp, Moritz A.
  • Hänsel, Martin C.

Abstract

We study how the scarcity of non-market goods, such as environmental amenities, affects the economic appraisal of climate policy. To this end, we perform a comprehensive analysis of the change in relative prices of non-market goods in the widespread climate-economy model DICE. We show that DICE already contains relative prices implicitly and that the impact of the scarcity of non-market goods on climate policy evaluation is therefore more pervasive than previously suggested. We calibrate DICE based on empirical evidence and propose a plausible range for relative price changes. The uncertainty is substantial, with relative price changes ranging from 1.3 to 9.6 percent in 2020. For our central calibration, the relative price change amounts to 4.4 percent in 2020. Neglecting relative prices leads to an underestimation of the social cost of carbon in 2020 of more than 40 percent. Accounting for these changes is equivalent to a decrease in pure time preference by more than a half percentage point. Our findings support initiatives to consider relative prices in governmental project appraisal and offer guidance for the evaluation of climate policy.

Suggested Citation

  • Drupp, Moritz A. & Hänsel, Martin C., 2018. "Relative prices and climate policy: How the scarcity of non-market goods drives policy evaluation," Economics Working Papers 2018-01, Christian-Albrechts-University of Kiel, Department of Economics.
  • Handle: RePEc:zbw:cauewp:201801
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    Cited by:

    1. Quaas, Martin F. & Baumgärtner, Stefan & Drupp, Moritz A. & Meya, Jasper N., 2020. "Intertemporal utility with heterogeneous goods and constant elasticity of substitution," Economics Letters, Elsevier, vol. 191(C).
    2. Meya, Jasper N. & Drupp, Moritz A. & Hanley, Nick, 2021. "Testing structural benefit transfer: The role of income inequality," Resource and Energy Economics, Elsevier, vol. 64(C).
    3. Rick Van der Ploeg, 2020. "Discounting And Climate Policy," OxCarre Working Papers 244, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
    4. Zhu, Xueqin & Smulders, Sjak & de Zeeuw, Aart, 2019. "Discounting in the presence of scarce ecosystem services," Journal of Environmental Economics and Management, Elsevier, vol. 98(C).
    5. Michalis Skourtos & Dimitris Damigos & Areti Kontogianni & Christos Tourkolias & Alistair Hunt, 2019. "Embedding Preference Uncertainty for Environmental Amenities in Climate Change Economic Assessments: A “Random” Step Forward," Economies, MDPI, Open Access Journal, vol. 7(4), pages 1-22, October.
    6. Yamaguchi, Rintaro & Shah, Payal, 2020. "Spatial discounting of ecosystem services," Resource and Energy Economics, Elsevier, vol. 62(C).
    7. Kornek, Ulrike & Klenert, David & Edenhofer, Ottmar & Fleurbaey, Marc, 2021. "The social cost of carbon and inequality: When local redistribution shapes global carbon prices," Journal of Environmental Economics and Management, Elsevier, vol. 107(C).
    8. Richard S.J. Tol, 2021. "Estimates of the social cost of carbon have not changed over time," Working Paper Series 0821, Department of Economics, University of Sussex Business School.

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    More about this item

    Keywords

    climate policy; discounting; non-market goods; social cost of carbon; substitutability;
    All these keywords.

    JEL classification:

    • Q01 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Sustainable Development
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General

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