Hostname: page-component-78c5997874-94fs2 Total loading time: 0 Render date: 2024-11-06T21:14:27.236Z Has data issue: false hasContentIssue false
  • English
  • Français

Discounting and intragenerational equity

Published online by Cambridge University Press:  02 November 2017

Johannes Emmerling
Johannes Emmerling*
Affiliation:
Fondazione Eni Enrico Mattei (FEEM) and Centro Euro-Mediterraneo sui Cambiamenti Climatici (CMCC), Corso Magenta 63, 20123 Milan, Italy
*
*Corresponding author. Email: [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

We study the social discount rate, taking into account inequality within generations, that is, across countries or individuals. We show that if inequality decreases over time, the social discount rate should be lower than the one obtained by the standard Ramsey rule under certain but reasonable conditions. Applied to the global discount rate and due to the projected convergence across countries, this implies that the inequality adjusted discount rate should be about twice as high as the standard Ramsey rule predicts. For individual countries on the other hand, where inequality tends to increase over time, the effect goes in the other direction. For the United States for instance, this inequality effect leads to a reduction of the social discount rate by about 0.5 to 1 percentage points. We also present an analytical formula for the social discount rate allowing us to disentangle inequality, risk, and intertemporal fluctuation aversion.

Keywords

Discountinginequalityclimate changeconvergence

JEL classification

D63: Equity, Justice, Inequality, and Other Normative Criteria and Measurement Q54: Climate • Natural Disasters and Their Management • Global Warming H43: Project Evaluation • Social Discount Rate
Type
Research Article
Information
Environment and Development Economics , Volume 23 , Issue 1 , February 2018 , pp. 19 - 36
Copyright
Copyright © Cambridge University Press 2017 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Atkinson, AB (1970) On the measurement of inequality. Journal of Economic Theory 2(3), 244–263.Google Scholar
Atkinson, AB and Brandolini, A (2010) On analyzing the world distribution of income. World Bank Economic Review 24(1), 1–37.CrossRefGoogle Scholar
Atkinson, GD, Dietz, S, Helgeson, J, Hepburn, C and Slen, H (2009) Siblings, not triplets: social preferences for risk, inequality and time in discounting climate change. Economics - The Open Access, Open Assessment E-Journal 3(26), 1–29.CrossRefGoogle Scholar
Azar, C and Sterner, T (1996) Discounting and distributional considerations in the context of global warming. Ecological Economics 19(2), 169–184.CrossRefGoogle Scholar
Barsky, RB, Juster, FT, Kimball, MS and Shapiro, MD (1997) Preference parameters and behavioral heterogeneity: an experimental approach in the health and retirement study. The Quarterly Journal of Economics 112(2), 537–579.Google Scholar
Bommier, A (2007) Risk aversion, intertemporal elasticity of substitution and correlation aversion. Economics Bulletin 4(29), 1–8.Google Scholar
Bourguignon, F, Levin, V and Rosenblatt, D (2006) Global redistribution of income, Technical Report, The World Bank.CrossRefGoogle Scholar
Carlsson, F, Daruvala, D and Johansson-Stenman, O (2005) Are people inequality-averse, or just risk-averse? Economica 72(287), 375–396.CrossRefGoogle Scholar
Clarkson, R and Deyes, K (2002) Estimating the social cost of carbon emissions, Technical Report 140, HM Treasury.Google Scholar
Conceiao, P and Zhang, Y (2010) Discounting in the context of climate change economics: the policy implications of uncertainty and global asymmetries. Environmental Economics and Policy Studies 12(1–2), 31–57.CrossRefGoogle Scholar
Cowell, F (2011) Measuring Inequality, London School of Economics Perspectives in Economic Analysis. Oxford, New York: Oxford University Press.Google Scholar
Crespo, Cuaresma J (2017) Income projections for climate change research: a framework based on human capital dynamics. Global Environmental Change 42, 226–236.Google Scholar
Crost, B and Traeger, CP (2014) Optimal CO2 mitigation under damage risk valuation. Nature Climate Change 4(7), 631–636.Google Scholar
De Carvalho, M (2015) An investigation on societal inequality aversion in Western Europe, mimeo.Google Scholar
Dellink, R, Chateau, J, Lanzi, E and Magn, B (2017) Long-term economic growth projections in the shared socioeconomic pathways. Global Environmental Change 42, 200–214.Google Scholar
Drupp, M, Freeman, M, Groom, B and Nesje, F (2015) Discounting disentangled: an expert survey on the determinants of the long-term social discount rate, GRI Working Paper 196a, Grantham Research Institute on Climate Change and the Environment.Google Scholar
Epstein, LG and Zin, SE (1989) Substitution, risk aversion, and the temporal behavior of consumption and asset returns: a theoretical framework. Econometrica 57(4), 937–969.Google Scholar
Epstein, LG and Zin, SE (1991) Substitution, risk aversion, and the temporal behavior of consumption and asset returns: an empirical analysis. The Journal of Political Economy 99(2), 263–286.CrossRefGoogle Scholar
Evans, DJ (2005) The elasticity of marginal utility of consumption: estimates for 20 OECD countries. Fiscal Studies 26(2), 197–224.CrossRefGoogle Scholar
Fankhauser, S, Tol, RSJ and Pearce, DW (1997) The aggregation of climate change damages: a welfare theoretic approach. Environmental and Resource Economics 10(3), 249–266.Google Scholar
Fleurbaey, M and Zuber, S (2015) Discounting, risk and inequality: a general approach. Journal of Public Economics 128, 34–49.Google Scholar
Gierlinger, J and Gollier, C (2008) Socially efficient discounting under ambiguity aversion, Technical Report 561, IDEI, Toulouse.Google Scholar
Gollier, C (2002) Discounting an uncertain future. Journal of Public Economics 85(2), 149–166.Google Scholar
Gollier, C (2008) Discounting with fat-tailed economic growth. Journal of Risk and Uncertainty 37(2), 171–186.CrossRefGoogle Scholar
Gollier, C (2010) Ecological discounting. Journal of Economic Theory 145(2), 812–829.CrossRefGoogle Scholar
Gollier, C (2011) Pricing the Future: the Economics of Discounting and Sustainable Development. Princeton, NJ, USA: Princeton University Press.Google Scholar
Gollier, C (2015) Discounting, inequality and economic convergence. Journal of Environmental Economics and Management 69, 53–61.Google Scholar
Gollier, C and Weitzman, ML (2010) How should the distant future be discounted when discount rates are uncertain? Economics Letters 107(3), 350–353.Google Scholar
Gollier, C and Zeckhauser, R (2005) Aggregation of heterogeneous time preferences. Journal of Political Economy 113(4), 878–896.Google Scholar
Jouini, E, Marin, J-M and Napp, C (2010) Discounting and divergence of opinion. Journal of Economic Theory 145(2), 830–859.Google Scholar
Kihlstrom, RE and Mirman, LJ (1974) Risk aversion with many commodities. Journal of Economic Theory 8(3), 361–388.Google Scholar
Kimball, MS (1990) Precautionary saving in the small and in the large. Econometrica 58(1), 53–73.Google Scholar
Kimball, MS and Weil, P (2009) Precautionary saving and consumption smoothing across time and possibilities. Journal of Money, Credit and Banking 41(23), 245–284.Google Scholar
Kocherlakota, NR (1996) The equity premium: it's still a puzzle. Journal of Economic Literature 34(1), 42–71.Google Scholar
Nordhaus, WD (2007) A review of the Stern Review on the economics of climate change. Journal of Economic Literature 45(3), 686–702.Google Scholar
Nordhaus, WD (2014) Estimates of the social cost of carbon: concepts and results from the DICE-2013R model and alternative approaches. Journal of the Association of Environmental and Resource Economists 1(1/2), 273–312.Google Scholar
Ramsey, FP (1928) A mathematical theory of saving. The Economic Journal 38(152), 543–559.Google Scholar
Riahi, K, van Vuuren, DP, Kriegler, E, Edmonds, J, ONeill, BC, Fujimori, S, Bauer, N, Calvin, K, Dellink, R, Fricko, O, Lutz, w, Popp, A, Crespo, Cuaresma J, KC, S, Leimbach, M, Jiang, L, Kram, T, Rao, S, Emmerling, J, Ebi, K, Hasegawa, T, Havlik, P, Humpenpender, F, Silva, LA Da, Smith, S, Stehfest, E, Bosetti, V, Eom, J, Gernaat, D, Masui, T, Rogelj, J, Strefler, J, Drouet, L, Krey, V, Luderer, G, Harmsen, M, Takahashi, K, Baumstark, L, Doelman, JC, Kainuma, M, Klimont, Z, Marangoni, G, Lotze-Campen, H, Obersteiner, M, Tabeau, A and Tavoni, M (2017) The shared socioeconomic pathways and their energy, land use, and greenhouse gas emissions implications: an overview. Global Environmental Change 42, 153–168.Google Scholar
Samir, KC and Lutz, W (2017) The human core of the shared socioeconomic pathways: population scenarios by age, sex and level of education for all countries to 2100. Global Environmental Change 42, 181–192.Google Scholar
Schelling, TC (1995) Intergenerational discounting. Energy Policy 23(4–5), 395–401.Google Scholar
Spackman, M (2001) Public investment and discounting in European Union member states. OECD Journal of Budgeting 1(2), 213–260.Google Scholar
Stern, N (2006) Stern Review: the Economics of Climate Change. London: HM Treasury.Google Scholar
Sterner, T and Persson, UM (2007) An even Sterner review: introducing relative prices into the discounting debate, Technical Report, Resources For the Future.Google Scholar
Tol, RSJ (2005) The marginal damage costs of carbon dioxide emissions: an assessment of the uncertainties. Energy Policy 33(16), 2064–2074.CrossRefGoogle Scholar
Tol, RSJ (2010) International inequity aversion and the social cost of carbon. Climate Change Economics (CCE) 1(1), 21–32.Google Scholar
Traeger, CP (2009) Recent developments in the intertemporal modeling of uncertainty. Annual Review of Resource Economics 1(1), 261–286.Google Scholar
UNDP (2007) Human Development Report 2007/2008. Fighting Climate Change: Human Solidarity in a Divided World. Hampshire, UK and New York: Palgrave Macmillan.Google Scholar
U.S. Census Bureau (2010) Income, poverty, and health insurance coverage in the United States: 2009, Technical Report.Google Scholar
Weitzman, ML (1998) Why the far-distant future should be discounted at its lowest possible rate. Journal of Environmental Economics and Management 36(3), 201–208.Google Scholar
Weitzman, ML (2009) On modeling and interpreting the economics of catastrophic climate change. Review of Economics and Statistics 91(1), 1–19.Google Scholar
Zhuang, J, Liang, Z, Lin, T and de Guzman, F (2007) Theory and practice in the choice of social discount rate for cost-benefit analysis: a survey, ERD Working Paper (ADB) No. 94.Google Scholar