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2016 | OriginalPaper | Buchkapitel

Discounting Utility and the Evaluation of Climate Policy

verfasst von : Larry Karp

Erschienen in: The Economics of the Global Environment

Verlag: Springer International Publishing

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Abstract

This essay discusses the relation between utility discounting and climate policy. Using a cost-benefit model, I show that the planner’s willingness to pay to eliminate a climate event is greater, but less sensitive to discounting, when the event is random instead of deterministic. Examples in an optimizing setting show that policy may be less sensitive to discounting, the more nonlinear is the underlying model. I then explain why, in general, there should be no presumption that the risk of catastrophe swamps discounting in the assessment of climate policy. I conclude by pointing out that intertemporal transfers between the same agent at different points in their life, and transfers between different agents at different points in time, are qualitatively different, and should not be assessed using the same discount rate.

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Vorheriges Kapitel Climate Change, Catastrophic Risks and Social Choice Theory

Nächstes Kapitel Global Warming and Economic Externalities

Nur mit Berechtigung zugänglich

The utility discount rate (the pure rate of time preference, or PRTP) is related to, but distinct from, the social discount rate, used to compare consumption (as distinct from utility) across two points in time. In the standard deterministic setting, the social discount rate equals the PRTP plus the growth rate multiplied by the inverse of the elasticity of intertemporal substitution. The latter provides a measure of the willingness to substitute consumption between “infinitely close” periods.

The model in this section is based on Karp and Tsur (2008). That paper considers non-constant PRTP, whereas here the PRTP is constant. In the model here, society can eliminate the risk, whereas in the Karp and Tsur model society is able only to prevent the hazard from increasing. Neither model is nested in the other. Appendix 1 derives Eqs. 1 and 2.

Figures 11, and 12 in Appendix 1 shows graphs of the premia as functions of $\eta $, and g. Those parameters have the same qualitative effect as $\rho $ on the two premia (under deterministic and stochastic event time), although of course the magnitudes of their effects are different.

The increase in the tax from $42/tC to $102/tC leads to a fall in per capital income (during the period when it is lowest, presumably the first period) from $6,801 to $6,799, i.e. about 0.03 %. In view of parameter uncertainty, a 0.03 % reduction in per capita income, equivalently a $15 billion increase in aggregate abatement costs (at Gross World Product—GWP—of $50 trillion), is close to rounding error.

This model assumes that the sacrifice of one unit of consumption today makes one unit available in the future period. If instead, the sacrifice of v units makes $\theta \left( v\right) $ units available the future, the numerator of the right side of Eq. 4 becomes $\frac{du\left( c^{\prime }+\theta \left( v\right) \right) }{dv}\theta ^{\prime }\left( v\right) $. These and other extensions can be easily treated, but the simple model that I use is adequate for my purposes.

These numerical results are interesting, but someone who accepts the controversial interpretation of the dismal theorem will not regard them as a convincing counter-argument to that interpretation. All of the numerical experiments arise in a deterministic context, and in that respect they do not really confront the dismal theorem, which makes sense only in a setting with risk and uncertainty. For this reason, I think that Horowitz and Lange’s very simple treatment of the problem is particularly helpful.

In order to keep this example simple, suppose that current emissions affect only next period utility. Obviously, a realistic climate model has to take into account that today’s emissions persist in the atmosphere, affecting utility over a long span.

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Titel: Discounting Utility and the Evaluation of Climate Policy
verfasst von: Larry Karp
Verlag: Springer International Publishing
Buch: The Economics of the Global Environment
Print ISBN: 978-3-319-31941-4

Electronic ISBN: 978-3-319-31943-8

Copyright-Jahr: 2016
DOI: https://doi.org/10.1007/978-3-319-31943-8_19

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