Siblings, Not Triplets: Social Preferences for Risk, Inequality and Time in Discounting Climate Change

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractArguments about the appropriate discount rate often start by assuming a Utilitarian social welfare function with isoelastic utility, in which the consumption discount rate is a function of the (constant) elasticity of marginal utility along with the (much discussed) utility discount rate. In this model, the elasticity of marginal utility simultaneously reflects preferences for intertemporal substitution, aversion to risk, and aversion to (spatial) inequality. While these three concepts are necessarily identical in the standard model, this need not be so: well-known models already enable risk to be separated from intertemporal substitution. Separating the three concepts might have important implications for the appropriate discount rate, and hence also for long-term policy. This paper investigates these issues in the context of climate-change economics, by surveying the attitudes of over 3000 people to risk, income inequality over space and income inequality over time. The results suggest that individuals do not see the three concepts as identical, and indeed that preferences over risk, inequality and time are only weakly correlated. As such, relying on empirical evidence of risk or inequality preferences may not necessarily be an appropriate guide to specifying the elasticity of intertemporal substitution. Paper submitted to the special issue "Discounting the Long-Run Future and Sustainable Development" JEL: D01, D63, C90, Q51

The U.S. Government’s Social Cost of Carbon Estimates after Their First Two Years: Pathways for Improvement

“…Assuming future generations are wealthier, high risk aversion (which will increase the desire to abate GHG emissions) will thus also be correlated with a high inter-temporal discount rate (which will reduce the desire to abate emissions). However, results from the Climate Ethics Survey (Atkinson et al, 2009) indicate that attitudes toward risk aversion, intergenerational, and intra-generational equity are only weakly correlated. This survey of over 3000 people found a median value of η in the context of risk aversion in the range of 3-5, a median value of η in the context of intra-temporal equality in the range of 2-3 (but with the modal peak at >7.5 and a secondary peak at <1.0).…”

Sharing of Climate Risks across World Regions

“…2 While this framework using one single utility function is analytically very tractable, at least for the application, separating risk and fluctuation aversion is desirable to allow more realistic calibrations of preferences (Atkinson et al, 2009) and more meaningful comparative statics results. Hence we disentangle risk and fluctuation aversion in the spirit of Epstein and Zin (1989) to consider in particular the empirical observation that estimates for the degree of risk aversion are much higher than the level of fluctuation aversion.…”

“…Intuitively speaking, the question can be framed as whether risk aversion is considered at the global or regional level. This results in different evaluations based on whether the social planner exhibits different degrees of risk and inequity aversion, which is very plausible (Atkinson et al, 2009). Moreover, how risks are able to be shared across agents or countries, or risk transfers are allowed for, will affect the evaluation of climate change in disaggregated IAM models.…”

The Influence of the Specification of Climate Change Damages on the Social Cost of Carbon

“…Fundamentally, this is because the isoelastic utility function requires the elasticity of intertemporal substitution and the level of risk aversion to be controlled by a single elasticity of the marginal utility of consumption (η). Yet empirical psychological work (e.g., Atkinson et al, 2009) indicates that individuals are not equally averse to risk and to intertemporal inequality; future work should therefore examine the joint sensitivity of the SCC to damage specification and risk aversion in models with utility functions that do not require these parameters to be coupled (Traeger, 2009).…”