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Valuation of natural capital under uncertain substitutability

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  • Gollier, Christian

Abstract

Natural capital is complex to price notably because of the high uncertainties surrounding the substitutability of its future ecosystem services. We examine a two-tree Lucas economy where both the economic growth and the degree of substitutability are uncertain. We show that the uncertain substitutability raises the expected value of the service and the rate at which it should be discounted. The value effect dominates the discounting effect, so the economic value of natural capital is increased. When the prior beliefs about substitutability are Gaussian, the economic value of future ecosystem services goes to infinity for finite maturities.

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  • Gollier, Christian, 2017. "Valuation of natural capital under uncertain substitutability," TSE Working Papers 17-813, Toulouse School of Economics (TSE), revised Dec 2018.
    • Handle: RePEc:tse:wpaper:31743
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    Cited by:

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    2. Hänsel Martin C. & Edenhofer Ottmar, 2023. "A New Decade of Research on the Economics of Climate Change," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 243(5), pages 471-476, October.
    3. Kalsbach, Oliver & Rausch, Sebastian, 2024. "Pricing carbon in a multi-sector economy with social discounting," Journal of Environmental Economics and Management, Elsevier, vol. 125(C).
    4. Maureen L. Cropper & Yongjoon Park, 2024. "Incorporating Air and Water Pollution into the National Income and Product Accounts," NBER Chapters, in: Measuring and Accounting for Environmental Public Goods: A National Accounts Perspective, National Bureau of Economic Research, Inc.
    5. Moritz A. Drupp & Jasper N. Meya & Björn Bos & Simon Disque, 2024. "Heterogeneous Substitutability Preferences," CESifo Working Paper Series 11197, CESifo.
    6. Jonas Heckenhahn & Moritz A. Drupp, 2024. "Relative Price Changes of Ecosystem Services: Evidence from Germany," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 87(3), pages 833-880, March.
    7. Lopez, Ramon E. & Pastén, Roberto & Gutiérrez Cubillos, Pablo, 2022. "Climate change in times of economic uncertainty: A perverse tragedy of the commons?," Economic Analysis and Policy, Elsevier, vol. 75(C), pages 209-225.
    8. Dupoux, Marion & Martinet, Vincent, 2022. "Could the environment be a normal good for you and an inferior good for me? A theory of context-dependent substitutability and needs," Resource and Energy Economics, Elsevier, vol. 69(C).
    9. Michalis Skourtos & Dimitris Damigos & Areti Kontogianni & Christos Tourkolias & Alistair Hunt, 2019. "Embedding Preference Uncertainty for Environmental Amenities in Climate Change Economic Assessments: A “Random” Step Forward," Economies, MDPI, vol. 7(4), pages 1-22, October.
    10. Lanlan Luo & Shou Chen & Ziran Zou, 2020. "Determining the Generalized Discount Rate for Risky Projects," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 77(1), pages 143-158, September.
    11. Jasper N. Meya & Stefan Baumgärtner & Moritz A. Drupp & Martin F. Quaas, 2020. "Inequality and the Value of Public Natural Capital," CESifo Working Paper Series 8752, CESifo.

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    More about this item

    Keywords

    Asset pricing; CCAPM beta; discounting; bioeconomics;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • Q01 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Sustainable Development

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