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Modified Ramsey Discounting for Climate Change

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  • Richard S.J. Tol

    (University of Sussex, United Kingdom; VU University Amsterdam, The Netherlands)

Abstract

The Ramsey rule for the consumption rate of discount assumes a transfer of money of a (representative) agent at one point in time to the same agent at another point in time. Climate policy (implicitly) transfers money not just over time but also between agents. I propose three alternative modifications of the Ramsey rule to account for this. Taking the Ramsey rule as given, I derive an intuitively clear but ad hoc modification. Using the assumptions underlying the Ramsey rule, I derive a consistent but more elaborate modification. If the discount rate is differentiated by victim, the consistent modified Ramsey rule is simpler and identical to regional equity weights. I apply the modified Ramsey rules to estimates of the marginal damage costs of carbon dioxide emissions. The results confirm that optimal climate policy has differentiated carbon taxes. Results also show that the standard Ramsey rule drastically underestimates the social cost of carbon.

Suggested Citation

  • Richard S.J. Tol, 2013. "Modified Ramsey Discounting for Climate Change," Tinbergen Institute Discussion Papers 13-130/VIII, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20130130
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    References listed on IDEAS

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    1. Tol, Richard S. J., 2011. "Modified Ramsey Discounting for Climate Change," Papers WP368, Economic and Social Research Institute (ESRI).
    2. Martin L. Weitzman, 2009. "On Modeling and Interpreting the Economics of Catastrophic Climate Change," The Review of Economics and Statistics, MIT Press, vol. 91(1), pages 1-19, February.
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    Cited by:

    1. Disa Asplund, 2019. "Combining discounting and distributional weights. Lessons from climate change economic assessments," ECONOMICS AND POLICY OF ENERGY AND THE ENVIRONMENT, FrancoAngeli Editore, vol. 0(1), pages 181-201.
    2. Cherp, Aleh & Vinichenko, Vadim & Jewell, Jessica & Suzuki, Masahiro & Antal, Miklós, 2017. "Comparing electricity transitions: A historical analysis of nuclear, wind and solar power in Germany and Japan," Energy Policy, Elsevier, vol. 101(C), pages 612-628.
    3. Yingying Lu & David I. Stern, 2016. "Substitutability and the Cost of Climate Mitigation Policy," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 64(1), pages 81-107, May.
    4. del Río, Pablo, 2017. "Why does the combination of the European Union Emissions Trading Scheme and a renewable energy target makes economic sense?," Renewable and Sustainable Energy Reviews, Elsevier, vol. 74(C), pages 824-834.
    5. Basurto, Saul, 2016. "A Mexican Ricardian analysis: land rental prices or net revenues?," 90th Annual Conference, April 4-6, 2016, Warwick University, Coventry, UK 236362, Agricultural Economics Society.
    6. Mark van de Logt, 2016. "?The Most Dangerous Man on the Planet\," Proceedings of International Academic Conferences 3505987, International Institute of Social and Economic Sciences.
    7. Tol, Richard S. J., 2011. "Modified Ramsey Discounting for Climate Change," Papers WP368, Economic and Social Research Institute (ESRI).
    8. Vally Koubi & Sebastian Stoll & Gabriele Spilker, 2016. "Perceptions of environmental change and migration decisions," Climatic Change, Springer, vol. 138(3), pages 439-451, October.
    9. Keller, Victor & Lyseng, Benjamin & Wade, Cameron & Scholtysik, Sven & Fowler, McKenzie & Donald, James & Palmer-Wilson, Kevin & Robertson, Bryson & Wild, Peter & Rowe, Andrew, 2019. "Electricity system and emission impact of direct and indirect electrification of heavy-duty transportation," Energy, Elsevier, vol. 172(C), pages 740-751.
    10. Moritz Bohland & Jana Lippelt & Ana Maria Montoya Gómez & Thomas Ruppert & Marie-Theres von Schickfus, 2015. "Kurz zum Klima: Im Vorfeld der Weltklimakonferenz in Paris," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 68(22), pages 56-63, November.

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    More about this item

    Keywords

    Climate change; social cost of carbon; discount rate; Ramsey rule; equity;
    All these keywords.

    JEL classification:

    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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