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Endogenous Discounting and Climate Policy

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Under risk of abrupt climate change, the occurrence hazard is added to the social discount rate. As a result, the social discount rate (i) increases and (ii) turns endogenous to the global warming policy. The second effect bears profound policy implications that are magnified by economic growth. In particular, we find that greenhouse gases (GHG) emission should be terminated at a finite time so that the ensuing occurrence risk will vanish in the long run. Due to the public bad nature of the catastrophic risk, the second effect is ignored in a competitive allocation and unregulated economic growth will give rise to excessive emissions. In fact, the GHG emission paths under the optimal and competitive growth regimes lie at the extreme ends of the range of feasible emissions. We derive the Pigouvian hazard tax that implements the optimal growth regime.
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  • Yacov Tsur & Amos Zemel, 2009. "Endogenous Discounting and Climate Policy," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 44(4), pages 507-520, December.
    • Handle: RePEc:kap:enreec:v:44:y:2009:i:4:p:507-520
    DOI: 10.1007/s10640-009-9298-0
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    1. Karp, Larry & Tsur, Yacov, 2007. "Time perspective, discounting and climate change policy," Discussion Papers 290003, Hebrew University of Jerusalem, Department of Agricultural Economics and Management.
    2. Tsur, Yacov & Zemel, Amos, 1996. "Accounting for global warming risks: Resource management under event uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 20(6-7), pages 1289-1305.
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    6. Stern,Nicholas, 2007. "The Economics of Climate Change," Cambridge Books, Cambridge University Press, number 9780521700801.
    7. Karp, Larry & Tsur, Yacov, 2011. "Time perspective and climate change policy," Journal of Environmental Economics and Management, Elsevier, vol. 62(1), pages 1-14, July.
    8. Karp, Larry S. & Tsur, Yacov, 2007. "Discounting And Climate Change Policy," Discussion Papers 7149, Hebrew University of Jerusalem, Department of Agricultural Economics and Management.
    9. Yacov Tsur & Amos Zemel, 2008. "Regulating environmental threats," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 39(3), pages 297-310, March.
    10. Wilfred Beckerman & Cameron Hepburn, 2007. "Ethics of the Discount Rate in the Stern Review on the Economics of Climate Change," World Economics, World Economics, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 8(1), pages 187-210, January.
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    12. William D. Nordhaus, 2007. "A Review of the Stern Review on the Economics of Climate Change," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 686-702, September.
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    More about this item

    Keywords

    Abrupt climate change; Hazard rate; Discounting; Economic growth; Emission policy; H23; H41; O40; Q4;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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