Discounting for Climate Change

By David Anthoff, Richard S. J. Tol, Gary W. Yohe. 2009

403 citations recorded by the source corpus.

Abstract It is well-known that the discount rate is crucially important for estimating the social cost of carbon, a standard indicator for the seriousness of climate change and desirable level of climate policy. The Ramsey equation for the discount rate has three components: the pure rate of time preference, a measure of relative risk aversion, and the rate of growth of per capita consumption. Much of the attention on the appropriate discount rate for long-term environmental problems has focussed on the role played by the pure rate of time preference in this formulation. We show that the other two elements are numerically just as important in considerations of anthropogenic climate change. The elasticity of the marginal utility with respect to consumption is particularly important because it assumes three roles: consumption smoothing over time, risk aversion, and inequity aversion. Given the large uncertainties about climate change and widely asymmetric impacts, the assumed rates of risk and inequity aversion can be expected to play significant roles. The consumption growth rate plays multiple roles, as well. It is one of the determinants of the discount rate, and one of the drivers of emissions and hence climate change. We also find that the impacts of climate change grow slower than income, so the effective discount rate is higher than the real discount rate. Moreover, the differential growth rate between rich and poor countries determines the time evolution of the size of the equity weights. As there are a number of crucial but uncertain parameters, it is no surprise that one can obtain almost any estimate of the social cost of carbon. We even show that, for a low pure rate of time preference, the estimate of the social cost of carbon is indeed arbitrary—as one can exclude neither large positive nor large negative impacts in the very long run. However, if we probabilistically constrain the parameters to values that are implied by observed behaviour, we find that the expected social cost of carbon, corrected for uncertainty and inequity, is approximate 60 US dollar per metric tonne of carbon (or roughly $17 per tonne of CO2) under the assumption that catastrophic risk is zero. Data material available at http://www.fnu.zmaw.de/FUND.5679.0.html

Subfields: Economics and Econometrics, Renewable Energy, Sustainability and the Environment

View Paper: https://www.semanticscholar.org/paper/9bfee100501be7935a0173b0db2a5ca47b116734

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Citations in the corpus

Should Governments Use a Declining Discount Rate in Project Analysis? (2014, background): “To illustrate, we begin with the case in which shocks to consumption are independently and identically distributed (i.e., uncorrelated over time), which yields what is known as the extended Ramsey formula.”
The Stern Review and its critics: economics at work in an interdisciplinary setting (2011, background): “Daskalakis and Markellos (2008) and Cetin and Verschuere (2010). Finally, a tough challenge is to bridge the gap between ecological economics with mainstream climate change economics.”
Targets for global climate policy: an overview (2013, background): “Anthoff et al. (2009a) and Anthoff and Tol (2010b) explore equity weights in the context of a regional decision maker.”
On Welfare Frameworks and Catastrophic Climate Risks (2013, neutral): “Since the publication of the Stern review on the economics of climate change [63], economists have been heatedly debating the appropriate welfare framework for evaluating climate change policy [66,50,13,64,16,31].”
Simulation versus Optimisation: Theoretical Positions in Energy System Modelling (2017, result): “The issue became heated again when the Stern Review on the economics of climate change argued for a low discount rate [69] and immediately was opposed by mainstream economists (Nordhaus [70]; Yohe and Tol [71]; Dasgupta [72]).”
The behavioural economics of climate change (2008, background): “However, as pointed out by Dasgupta (forthcoming) , Beckerman and Hepburn (2007), and Dietz et al. (forthcoming), ethics is involved in choosing the σ-parameter, too.”
THE CHOICE OF DISCOUNT RATE FOR CLIMATE CHANGE POLICY EVALUATION (2012, positive): “…when the DICE model applies Nordhaus’s preferred consumption discount rate of 4.3 percent, it yields an 13 However, Dasgupta et al. (1999) and Dasgupta (2008) point out that for some countries, it cannot be guaranteed that growth will be positive over the relevant time interval,…”
What have economists learned about valuing nature? A review essay (2013, methodology): “Environmental economists have long maintained that estimates of TFP overestimate technological change because they do not adequately take into account the draw-down of the stock of natural capital (Dasgupta and Mäler, 2000; Repetto et al., 1989). Vouvaki and Xeapapadeas (2008) found that when the en”
GHG Targets as Insurance Against Catastrophic Climate Damages (2012, methodology): “It serves as a routine upper bound in attempts to communicate what the most severe global warming might signify, including the famous burning embers diagram of the IPCC and several other popular expositions.8 One recent study9 asked 52 experts for their subjective probability estimates of triggering”
The Economics of Growth (2008, background): “Within the AK framewok, the main reference is Lucas (1988), who was himself directly inspired by Becker’s (1964) theory of human capital.”
Risk-Adjusted Gamma Discounting (2010, neutral): “11Among many other such criticisms, see, e.g., Dasgupta (2008), Nordhaus (2007) or Weitzman (2007).”