Endogenous Discounting and Climate Policy

Under risk of abrupt climate change, the occurrence hazard is added to the social discount rate. As a result, the social discount rate (i) increases and (ii) turns endogenous to the global warming policy. The second effect bears profound policy implications that are magnified by economic growth. In particular, we find that greenhouse gases (GHG) emission should be terminated at a finite time so that the ensuing occurrence risk will vanish in the long run. Due to the public bad nature of the catastrophic risk, the second effect is ignored in a competitive allocation and unregulated economic growth will give rise to excessive emissions. In fact, the GHG emission paths under the optimal and competitive growth regimes lie at the extreme ends of the range of feasible emissions. We derive the Pigouvian hazard tax that implements the optimal growth regime.


Issue Date:
2008
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/37944
JEL Codes:
H23; H41; O13; O40; Q54; Q58
Series Statement:
Discussion Paper
6.08




 Record created 2017-04-01, last modified 2017-08-25

Fulltext:
Download fulltext
PDF

Rate this document:

Rate this document:
1
2
3
 
(Not yet reviewed)