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Discounting climate change damages: working note for the Stern review

Hepburn, Cameron (2006) Discounting climate change damages: working note for the Stern review. Cameron Hepburn. (Unpublished)

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Abstract

This working note provides a basic overview of discounting in the context of climate change policy. After defining the social discount factor and social discount rate in terms of shadow prices (section 2), and noting the limitations of cost-benefit analysis for climate change (section 3), the determination of efficient social discount rates is discussed given: the impact of uncertainty about future economic conditions (section 4.2), the effect of heterogeneous time preferences (4.3) and time inconsistency issues (4.4). Fairness between generations is then discussed (5.1) and some alternatives to using discount factors are considered (5.2). It is concluded that the shadow discount rate should be declining over time to reflect the certainty-equivalent path. It is also argued that the underlying utility discount rate is very small, possibly zero to a first approximation.

Item Type: Monograph (Working Paper)
Additional Information: © 2006 The Authors
Library of Congress subject classification: G Geography. Anthropology. Recreation > GE Environmental Sciences
Sets: Research centres and groups > Grantham Research Institute on Climate Change and the Environment
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 02 Mar 2011 12:25
URL: http://eprints.lse.ac.uk/33006/

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