Abstract
While there is a considerable debate regarding the choice of proper discount rates for assessing climate change projects and policies, only a tiny body of literature emphasizes “what to discount”. Usually, climate change economic assessments rely on tools and methods that employ strong simplifications, assuming, among others, given and fixed preferences about the values of man-made and environmental goods. Aiming to fill a gap in the literature, this paper leaves aside the issue of discounting and focuses on the nature and impact of preference uncertainty on the economic estimates of future climate change damages on ecosystem non-market goods and services. To this end, a general random walk-based stochastic model is proposed, combining a number of parameters, e.g., the growth of income, depletion of environmental assets, the elasticity of income and demand, and the change in preferences towards the environment. The illustrative application of the model shows that the value of environmental losses is significantly affected by the change in preferences. By doing so, the model allows the analyst to visualize future paths of preference evolutions and to bring future values of damaged environmental assets realistically to the fore. If these elements are neglected when estimating climate change-related future damages to environmental goods and services, the results may be too narrow from a policy perspective.
Highlights
Present policies that aim at addressing issues in health, insurance, education, infrastructure, space exploration, etc., have impacts that frequently extend into the far future
Economies 2019, 7, 107 into the future—focuses on the choice of proper discount rate on the basis of which future benefits are made comparable to present costs, e.g
Current methodological tools assume that there exists a perfect substitutability between market and non-market goods and that values related to environment remain unchanged
Summary
Present policies that aim at addressing issues in health, insurance, education, infrastructure, space exploration, etc., have impacts that frequently extend into the far future. This paper, leaving aside the issue of discounting, aims to add to the limited literature on the effect of preference uncertainty on the economic estimates of future climate change damages and in particular on the value that people place on environmental goods and services. For this purpose, a number of parameters, e.g., the growth of income, the depletion of environmental assets, and the change in preferences towards the environment, are explored and combined in a stochastic framework as a general random walk-based model, in order to simulate the growth rate of the non-market value for an environmental good or service.
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
