Differential rate of time preference as a factor in international climate change negotiations

Abstract

For most developing countries, the global warming problem, as a priority item, ranks well behind those of poverty and development. This paper uses a utility maximisation model to explore the objective preferences of rich and poor countries on the environment issue with the stock of clean environment treated as a depletable input in the production function, and implicitly as a good with intertemporal dimensions. It is shown that poorer nations have a higher rate of time preference than richer ones, and hence would choose consumption goods over an incremental unit of a clean environment. The individually–optimal solution to the common problem on the rate of depleting the world's environmental capital differs among countries, depending on factors like permanent income, stage of development, etc. It is concluded that in order to succeed, any climate change convention must recognise and address the factors responsible for the high rate of time preference in developing countries.