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| Title: | | On the Relation between Dual-Rate Discounting and Substitutability  |
| Authors: | | Kögel, Tomas |
| Issue Date: | | 2009 |
| Series/Report no.: | | Economics Discussion Papers / Institut für Weltwirtschaft 2009-10 |
| Abstract: | | To justify substantial emission reductions, recent literature on cost-benefit analysis of climate change suggests discounting environment consumption with an environmental discount rate instead of a consumption discount rate that is usually used in cost-benefit analysis. The present study clarifies that whether or not this dual-rate discounting approach succeeds in justifying substantial emission reductions depends on whether or not environment and goods consumption are substitutes in the Hicks-Allen sense and in the Edgeworth-Pareto sense (substitutes in the Hicks-Allen sense implies the Hicksian goods demand to be increasing in the relative price of environmental goods, while substitutes in the Edgeworth-Pareto sense implies the marginal utility of goods consumption to be decreasing in environment consumption). Moreover, a low intratemporal elasticity of substitution between environment and goods consumption within a period contributes to a low environmental discount rate in comparison to the consumption discount rate, while a low intertemporal elasticity of substitution between composite consumption of different periods contributes to declining discount rates over time. |
| Subjects: | | Discounting dual-rate discounting environmental discount rate cost-benefit analysis climate change |
| JEL: | | Q28 H43 D90 |
| Creative Commons License: | |  |
| Document Type: | | Working Paper |
| Appears in Collections: | | Economics: The Open-Access, Open-Assessment E-Journal - Discussion Papers
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