discounting and divergence of opinion the objective of this paper is to adopt a general equilibrium model and determine the socially efficient discount factor risk free rate and discount rate when there are heterogeneous anticipations about the growth of the economy as well as heterogeneous time preference rates among others we tackle the following questions is the socially efficient discount factor an arithmetic average of the individual subjectively anticipated discount factors more generally can the arrow debreu prices the risk free rates the subjectively expected socially efficient discount factors and discount rates be obtained as an average of the individual subjectively anticipated ones can beliefs dispersion be analyzed as a sort of additional risk or uncertainty leading to possibly lower discount rates is it socially efficient when diversity of opinion is taken into account to reduce the discount rate per year for more distant horizons if so what is the trajectory of the decline

fat tails exponents extreme uncertainty simulating catastrophe in dice abstract the problem of low probability catastrophic risk is increasingly central to discussion of climate science and policy but the integrated assessment models iams of climate economics rarely incorporate this possibility what modifications are needed to analyze catastrophic economic risks in an iam we explore this question using dice a well known iam we examine the implications of a fat tailed probability distribution for the climate sensitivity parameter a focus of recent work by martin weitzman and the shape of the damage function one of the issues raised by the stern review forecasts of disastrous economic outcomes in dice can result from the interaction of these two innovations but not from either one alone

the equivalency principle for discounting the value of natural assets an application to an investment project in the basque coast making decisions about optimal investments in green infrastructure necessitates setting social discount rates this paper suggests a practical way for determining the discount rate for projects or programmes in which one of the options is to maintain or improve land in its natural state we propose an a equivalency principlea to derive a simple rule that sets the discount rate the rule is based on the premise that the long term value of a naturally preserved land track ought to be at least the same as the value of an identical land track in the vicinity to which permission has been granted for development we illustrate this principle with various case studies and we apply it to a contentious investment project in the basque country associated with the regeneration of a large scale harbour in the province of gipuzkoa north of spain that involves reclaiming natural land that has important ecological value including for the conservation of a marine ecosystem

the ethics of intertemporal distribution in a warming planet this paper evaluates from the ethical viewpoint current work by economists on intergenerational resource allocation in the presence of global warming we begin by attempting to elucidate the debate that has recently occurred on the appropriate choice of the discountrate weofferthreejustificationsformaximizingthediscountedsumofgenerational utilities and find only one of these to be a satisfactory justification of that practice the pos sibility that the human species may become extinct this implies that a very small discount rate large discount factor should be used we argue that the justification for discounting inherent in the approaches taken by many economists is that of the present generation of hegemon which is unacceptable the role of the ramsey equation in deducing the discount rate in these theories is explained as an alternative to discounted utilitarianism we propose a principle of sustainability we describe optimal paths that have been calculated for the sus tainabilitiarian rawlsian objectivefunction andpathsthatwillsustaingrowthinwelfare at a positive rate we report results concerning optimal paths when the uncertainty of existence of future generations is taken into account in sharp contrast to the utilitarian model it turns out that under some conditions the sustainabilitarian can ignore the uncertainty regarding thedateatwhichhumansbecomeextinct thereisastrikingdifferencebetweenthesolutions of the discounted utilitarian program and the sustainabilitarian program under uncertainty

pricing carbon and adjusting capital to fend off climate catastrophes the optimal reaction to a potential productivity shock as a consequence of climate tipping is to substantially tax carbon in order to curb the risk of tipping but to adjust capital as well in order to smooth consumption when tipping occurs we also allow for conventional marginal climate damages and decompose the optimal carbon tax in two catastrophe components and the conventional component we distinguish constant and increasing marginal hazards moreover the productivity catastrophe is compared with recoverable catastrophes and with a shock to the climate sensitivity finally we allow for investments in adaptation capital as an alternative to counter the potential adverse effects of climate tipping quantitatively the results are investigated with a calibrated model for the world economy

global warming economics in the long run a conceptual framework economic models of climate change typically analyze its short run effects for example up to the year 2100 or for a doubling of atmospheric co2 this is a potentially serious shortcoming since under a business as usual scenario atmospheric co2 concentrations could more than quadruple we introduce a framework that endogenously accounts for long run climate change and examine the implications of alternative mitigation strategies one in which the rates of annual emissions are reduced and one that places absolute limits on the total amount of carbon released we discuss alternative valuation frameworks drawing on the debate surrounding the stern review

on the term structure of the foreign exchange rates and market efficiency abstract the efficiency hypothesis of the foreign exchange market is examined by considering the term structure of foreign exchange rates jointly with that of interest rates in the context of interest rate parity principle the canadian u s data are found to be consistent with the hypothesis of the market efficiency and a constant exchange risk premium

exchange rates and news reply abstract in this reply i arge that the results of my 1982 article in this journal are not affected either at a theoretical or empirical level by longworth s 1984 comments however i also argue that longworth s proposition of including variables pertaining to other countries in empirical market efficiency studies should be investigated further

economic news exchange rates and interest rates the paper esamines the post october 1979 response of exchange rates and interest rates to the new information contained in the first announcement of fifteen us macroeconomic series illarkets respond primarily to monetary news but also to news about the trade deficit domestic inflation and variables that reflect the state of the business cycle for all fifteen macroeconomic variables an increase decrease in interest rates is accompanied by an appreciation depreciation of the dollar which is consistent with models that stress price rigidity and absence of purchasing power parity the effect of economic news on asset prices has received increasing attention in the economic literature because an outcome of the efficient markets rational expectations hypothesis is that flesible asset prices change the moment new information about future fundamentals arrives in the market in the exchange rate literature the role of news has gained importance because structural models have failed to predict most of the variation in exchange rates during the 1970s see imeese and rogoff 1983 researchers were naturally led to investigate the types of news that make exchange rates so volatile and to utilize news in order to test which model of exchange rate determination is consistent with the floating eschange rate experience notable studies are those of dornbusch 1980 frenkel 1981 edwards 1982a b 1983 copeland 1984 and rose 1984 in this paper i also examine the effects of macroeconomic news on eschange rates but i adopt a different more direct strategy one that complements previous work avoids some of its shortcomings and promises interesting conclusions i examine the instantaneous response of exchange rates the moment a piece of economic news hits the market if one can isolate the exact time during a business day when news arrives it is straightforward to examine the response of exchange rates because financial data are continuously available the advantages of the present methodology are many first it is possible to identify the exact types of economic news and how they affect exchange rates second the simultaneity bias which plagues the previous literature on exchange rates and news is not present here the independent variables that represent news can be interpreted as causal the paper was presented at the 1985 meeting ofthe american economic association the author wishes to thank sebastian edwards r w hafer nicholas karamouzis andrew rose and two anonymous referees for helpful comments kim rupert of the money market services for providing the survey data soo kounne for able research assistance and barnard college for research support

distributional preferences and the incidence of costs and benefits in climate change policy we explore the relationship between willingness to pay wtp for climate change mitigation and distributional preferences by which we mean individuals opinions about who should be responsible for climate change prevention and whether the share of climate change impacts borne by the poor is a cause for concern we use 1 770 responses to an online stated preference survey the domestic costs in our survey s policy choice scenarios are expressed as a set of randomized shares across four different payment vehicles and the international cost shares are randomized across four groups of countries we also elicit respondents perceptions of the likely regressivity of climate change impacts under a policy of business as usual wtp is higher when larger cost shares are borne by parties deemed to bear a greater responsibility for mitigation and when respondents believe and care that the impacts of climate change may be borne disproportionately by the world s poor that wtp for an environmental policy depends on the distributional consequences of the policy is an unsettling result efficiency assessments are typically assumed to be separate from equity considerations in most benefit cost analyses

the influence of fundamentals on exchange rates findings from analyses of news effects as we survey the literature of macroeconomic news in the foreign exchange market we can by now look back on nearly 30 years of research the first studies which analysed news effects on exchange rates were established in the early 1990s see for example dornbusch almost at the same time meese and rogoff published their influential paper revealing the forecasting inferiority in exchange rates of structural models against the random walk this finding has shocked the pillars of exchange rate economics and thus cast general suspicion on research focusing on fundamentals in this field the eventual rising popularity of event studies can partly be attributed to the re establishment of the raison d etre of exchange rate economics this work focuses on systematically surveying this literature with particular respect to its primary goal i e shedding light on the analytical value of fundamental research thus its major findings are first fundamental news does matter whereas non fundamental news matters to a lesser degree second news influences exchange rates via two separated channels i e incorporating common information into prices directly or indirectly based upon order flow third with a few exceptions the impact of fundamental news on exchange rates is fairly stable over time

testing for news in foreign exchange markets abstract traditional tests of the role of interest rate news on foreign exchange rates are analysed and found to be of little empirical value

the political economy of global carbon emissions reductions abstract the discussion about what reductions in greenhouse gas emissions are required and how the emissions rights might be distributed globally has fostered the belief that there is a fundamental conflict between the rich nations of the north and the poor but populous nations of the south the argument is that grandfathering the rights will only reinforce existing global inequalities while per capita distribution of the rights would lead to such huge transfers of wealth to the south as to be unacceptable to the north however a very simple general equilibrium model highlighting key elements of the global economy shows that this perception is incorrect under a plausible interpretation of the goal of the united nations framework convention on climate change to avoid dangerous anthropogenic interference with the climate system instead of using an economic damage function to determine the optimal level of emissions reductions the model s utility functions are calibrated to reflect scientific understanding of what would be required to stabilize the atmosphere at safe concentrations of greenhouse gases among policy options that would accomplish this the united states has a preference for grandfathering the allocation of emissions rights over a per capita allocation but this preference is not strong and could be offset by other geopolitical considerations

exchange rates and news a multi currency approach abstract in this paper a multi currency model is used to investigate the relationship between spot exchange rates forward rates market efficiency and new information it is shown that in a world with more than two countries the error term in the standard market efficiency tests will be correlated across rates it is also shown that the exchange rate can be expressed as a function of factors known in advance which are captured by the forward rate determined in the previous period and news the empirical results presented in the paper tend to support the model s implications

declining discount rates economic justifications and implications for long run policy should economic policy target immediate problems like malaria and aids or should it target climate change which may have even more dramatic life threatening effects in the very long term we discuss how the pattern of discount rates over the planning horizon bears on this important issue a declining pattern of discount rates is theoretically justified by uncertainty about future economic conditions and its shape and relevance can be estimated from historical data we analyse empirically long term interest rate data from nine countries construct a weighted average representing a possible global discount rate pattern for a very long range of future dates and assess its implications for the valuation of carbon mitigation policies christian gollier phoebe koundouri and theologos pantelidis

monetary valuation of the social cost of co2 emissions a critical survey an expanding branch of research has estimated the potential costs of climate change which are often expressed as the social cost of carbon scc or the costs of an additional ton of co2 emissions estimates of the scc can be used by policy makers to evaluate climate change policies and greenhouse gas emission reduction projects by means of cost benefit analyses cbas such analyses are complicated by the wide range of scc values that have been reported in the literature and the large uncertainties involved in estimating the potential economic impacts and related costs of climate change this study presents a critical review of the reported scc estimates by examining some neglected consequences of climate change uncertain and extreme scenarios of climate change the discounting of future climate change effects the treatment of individual risk aversion and assumptions about social welfare in view of the many uncertainties and omissions in conventional cost benefit analyses of climate impacts and the scc alternative approaches to decision making should be considered for climate policy

climate policy and the social cost of power generation impacts of the swedish national emissions target the purpose of this paper is to discuss how the design of climate policy in a small open economy may affect the internalization of carbon related external costs and ultimately the social choice between different power generation technologies empirically we focus on the swedish case and analyze three climate policy regimes out of which two represent different national goal formulations and thus compliance strategies the results show that the social choice between power generation technologies in sweden will be significantly influenced by the choice of climate policy regime most notably if sweden would abandon its present national target for carbon dioxide emissions and instead make full use of the country s participation in international emissions trading natural gas fired power would replace onshore wind power as the power generation source with the lowest social cost

climate change green growth and aid allocation to poor countries with serious impacts of climate change looming in a few decades but current poverty still high in the developing world we ask how to spend development aid earmarked for the poor poverty reduction tends to be strongly linked to economic growth but growth impacts the environment and increases co2 emissions so can greener growth that is more climate resilient and less environmentally damaging deliver large scale poverty reduction can aid be used for effective poverty reduction now without affecting carbon emissions substantially we argue that there are bound to be trade offs between emissions reductions and a greener growth on the one hand and growth that is most effective in poverty reduction we argue that development aid earmarked for the poorest countries should only selectively pay attention to climate change and remain focused on fighting current poverty reduction including via economic growth not least as future resilience of these countries and their population will depend on their ability to create wealth and build up human capital now the only use for development aid within the poorest countries for explicit climate related investment ought to be when the investments also contribute to poverty reduction now including for increasing resilience to current impacts of environmental shocks or when the investments done now have serious intertemporal lock in problems so that they have implications also for when climate change bites by 2050 in our conclusions we offer a series of concrete principles to judge development spending

the determination of optimal climate policy abstract analyses of the costs and benefits of climate policy such as the stern review evaluate alternative strategies to reduce greenhouse gas emissions by requiring that the cost of emission cuts in each and every year has to be covered by the associated value of avoided damage discounted by a an exogenously chosen rate an alternative is to optimize abatement programmes towards a stationary state where the concentrations of greenhouse gases are stabilized and shadow prices including the rate of discount are determined endogenously this paper examines the properties of optimized stabilization it turns out that the implications for the evaluation of climate policy are substantial if compared with evaluations of the present value of costs and benefits based on exogenously chosen shadow prices comparisons of discounted costs and benefits tend to exaggerate the importance of the choice of discount rate while ignoring the importance of future abatement costs which turns out to be essential for the optimal abatement path numerical examples suggest that early action may be more beneficial than indicated by comparisons of costs and benefits discounted by a rate chosen on the basis of current observations

oil monopoly and the climate this paper takes as given that i the burning of fossil fuel increases the carbon dioxide content in the atmosphere which ii in turn leads to global heating and global climate change of a variety that iii on net is harmful to our welfare to answer questions about the policy implications of this a comprehensive and quantitative analysis of the two way interaction between the economy with its fossil fuel use and the climate is necessary in this paper however we focus on a particular aspect of this interaction the role played by the industrial organization in the oil producing sector of the world without a clear understanding of the world market for oil the consequences of taxes and other policy instruments cannot be evaluated analyses of the world oil market that are based on perfect competition and a finite amount of oil typically predict i that the oil price satisfies the hotelling rule i e increases so that the rate of return on storing oil is equal to the return on the capital market ii that oil consumption follows a decreasing path and iii that extraction is sequential in the sense that sources with lower extraction costs are depleted before high cost sources are used all these predictions are problematic to reconcile with data our main point here is that the polar opposite case where oil is supplied by a large agent with zero extraction costs who internalizes the effects of his decisions on all aggregates seems useful for understanding historic and future developments in the oil market

the stern review a deconstruction using a simple model designed for transparency but nonetheless calibrated to support the much quoted damage estimates of the stern review of the economics of climate change we demonstrate significant sensitivity of those results to assumptions about the pure rate of time preference the time horizon and the rates of risk and equity aversion used to compute certainty and equity equivalent annuities most importantly we demonstrate enormous sensitivity to presumed constant regional vulnerability and underlying assumptions about adaptive capacity manipulation of any of these parameters one at a time across reasonable ranges can diminish damage estimates by as much as 84 or in the case of extending the time horizon with the review s low discount rate increase damage estimates by 900 we also confirm the usual result that limiting atmospheric concentrations to specific benchmarks above 400 ppm cannot eliminate all damages nonetheless we applaud the stern review author team for reconfirming that the climate problem can be approached productively as an economic problem whose solutions can be explored with the tools of decision analysis 2008 elsevier ltd all rights reserved

learning and climate feedbacks optimal climate insurance and fat tails we study the effect of potentially severe climate change on optimal climate change policy accounting for learning and uncertainty in the climate system in particular we test how fat upper tailed uncertainty over the temperature change from a doubling of greenhouse gases the climate sensitivity affects economic growth and emissions policy in addition we examine whether and how fast uncertainties could be diminished through bayesian learning our results indicate that while overall learning is slow the mass of the fat tail diminishes quickly since observations near the mean provide evidence against fat tails we denote as partial learning the case where the planner rejects high values of the climate sensitivity with high confidence even though significant uncertainty remains fat tailed uncertainty without learning reduces current emissions by 38 relative to certainty indicating significant climate insurance or paying to limit emissions today to reduce the risk of very high temperature changes is optimal however learning reduces climate insurance by about 50 the optimal abatement policy is strongly influenced by the current state of knowledge even though greenhouse gas ghg emissions are difficult to reverse non fat tailed uncertainty is largely irrelevant for optimal emissions policy

temperature shocks and welfare costs abstract this paper examines the welfare implications of rising temperatures using a standard var we empirically show that a temperature shock has a sizable negative and statistically significant impact on tfp output and labor productivity we rationalize these findings within a production economy featuring long run temperature risk in the model macro aggregates drop in response to a temperature shock consistent with the novel evidence in the data such adverse effects are long lasting over a 50 year horizon a one standard deviation temperature shock lowers both cumulative output and labor productivity growth by 1 4 percentage points based on the model we also show that temperature risk is associated with non negligible welfare costs which amount to 18 4 of the agent s lifetime utility and grow exponentially with the size of the impact of temperature on tfp finally we show that faster adaptation to temperature shocks results in lower welfare costs these welfare benefits become substantially higher in the presence of permanent improvements in the speed of adaptation

exchange rate market efficiency and new information abstract this paper uses a multi currency approach to analyze the relationship between forward exchange rates future spot rates and new information the empirical results tend to support the hypothesis that the exchange rate can be expressed as a function of factors known in advance and news

assessing the economic viability of alternative water resources in water scarce regions combining economic valuation cost benefit analysis and discounting abstract this paper demonstrates a comprehensive methodology for assessing the viability of an environmental management plan that has long run economic and ecological impacts the case study under consideration is the implementation of a water resource management plan in a water scarce region of the world namely cyprus specifically this plan proposes to replenish a depleting aquifer with treated wastewater the proposed methodology first identifies the key stakeholder groups farmers and the general public who are hypothesized to derive economic values benefits from implementation of this plan and then uses stated preference methods to capture the total economic value of these benefits benefits are aggregated over the relevant populations of these stakeholder groups and weighed against the total costs of implementing the plan in a long run cost benefit analysis cba an econometrically estimated time declining trajectory of discount rates is used for the cba in order to assess the long run sustainability of the plan the results reveal that the net benefit trajectory estimated with the time declining discount rate takes one and a half to three times as long to come to a plateau compared to the constant discount rates of 3 5 and 6 emphasizing the importance of using declining discount rates and capturing the entirety of the benefits generated by such plans this methodology is particularly recommended for providing much needed information to support the implementation of the eu water framework directive which advocates the use of cba with consideration of the notion of sustainability for achieving the good water status for all european waters

incorporating contemporaneous residual relationships for security prices abstract using a recent procedure developed by jalilvand and kryzanowski 1985 to capture the contemporaneous residual dependencies in a system of regression equations this paper tests the impact of such residual based relationships in explaining security prices utilizing a multi industry sample of securities over two non overlapping periods the empirical findings show that not only are these contemporaneous residual relationships statistically significant but their inclusion significantly improves the explanatory power of the underlying return generating model

discounting the distant future an experimental investigation we use a laboratory experiment to elicit discount rates over a 20 year time horizon using government savings bonds as a payment vehicle when using a constant exponential discount rate function we find an implied average discount rate of 4 9 which is much lower than has been found in previous experimental studies that used time horizons of days or months however we also find strong support for non constant declining discount rates for longer time horizons with an extrapolated implied annual discount rate approaching 0 5 in 100 years there is heterogeneity in discount rates and risk preferences in that people with more optimistic beliefs about technological progress have higher discount rates these findings contribute to the debate over the appropriate discount rate to use in comparing the long term benefits of climate change mitigation to the more immediate costs

a review of the stern review on the economics of climate change the stern review calls for immediate decisive action to stabilize greenhouse gases because the benefits of strong early action on climate change outweighs the costs the economic analysis supporting this conclusion consists mostly of two basic strands the first strand is a formal aggregative model that relies for its conclusions primari ly upon imposing a very low discount rate concerning this discount rate aspect i am skeptical of the review s formal analysis but this essay points out that we are actual ly a lot less sure about what interest rate should be used for discounting climate change than is commonly acknowledged the review s second basic strand is a more intuitive argument that it might be very important to avoid possibly large uncertain ties that are difficult to quantify concerning this uncertainty aspect i argue that it might be recast into sound analytical reasoning that might justify some of the review s conclusions the basic issue here is that spending money to slow global warming should perhaps not be conceptualized primarily as being about consump tion smoothing as much as being about how much insurance to buy to offset the small change of a ruinous catastrophe that is difficult to compensate by ordinary savings

cooperation on climate change mitigation abstract we analyze conditions under which it is possible to achieve efficient mitigation of greenhouse gas emissions with a self enforcing international agreement in which all countries find it in their self interest to abide by the agreement we model the choice of emissions by countries as a dynamic game we use a two part punishment scheme for deviations from an agreement that is renegotiation proof and show when this scheme supports the efficient outcome as a subgame perfect equilibrium using numerical examples we show that an efficient subgame perfect equilibrium exists for a range of reasonable parameter values the existence of such equilibrium may be non monotonic in the discount rate and the ratio of slope of marginal abatement cost and marginal damages

consistent climate policies what are the optimal climate policies when time preferences deviate from the standard exponential discounting and decision makers cannot commit to future policies we show that with time declining discounting the delay and persistence of climate impacts provide a commitment device to policy makers we quantify the commitment value in a climate economy model by solving time consistent markov equilibrium capital and emission taxes explicitly the returns on capital and climate investments are no longer equal leading to a large increase in the emission tax compared to a benchmark with equalized returns the commitment value increases the tax by a factor of 20 in our quantitative assessment

carbon prices for the next hundred years this paper examines the socially optimal pricing of carbon emissions over time when climate change impacts are unknown potentially high consequence events the carbon price tends to increase with income but learning about impacts or their absence decouples the carbon price from income growth the price should grow faster than the economy if the past warming is not substantial enough for learning the true long run social cost it grows slower than the economy as soon as the warming generates information about events that could have arrived but have not done so a quantitative assessment shows that the price grows roughly at the rate of the economy for the next 100 years

the behavioural economics of climate change this paper attempts to bring some central insights from behavioural economics into the economics of climate change in particular it discusses i implications of prospect theory the equity premium puzzle and time inconsistent preferences in the choice of discount rate used in climate change cost assessments and ii the implications of various kinds of social preferences for the outcome of climate negotiations several reasons are presented for why it appears advisable to choose a substantially lower social discount rate than the average return on investments it also seems likely that taking social preferences into account increases the possibilities of obtaining international agreements compared to the standard model however there are also effects going in the opposite direction and the importance of sanctions is emphasized

prioritarianism and climate change prioritarianism is the ethical view that gives greater weight to well being changes affecting individuals at lower well being levels this view is influential both in moral philosophy and in theoretical work on social choice where it is captured by a social welfare function swf summing a concave transformation of individual well being numbers however prioritarianism has largely been ignored by scholarship on climate change this article compares utilitarianism and prioritarianism as frameworks for evaluating climate policy it reviews the distinctive normative choices that are required for the prioritarian approach specifying a ratio scale for well being if the prioritarian swf takes the standard atkinson form determining the degree of concavity of the transformation function i e the degree of social inequality aversion and choosing between ex ante and ex post prioritarianism under conditions of risk the article also sketches some of salient implications of a prioritarian swf for climate policy with respect to the social cost of carbon the social discount rate optimal mitigation and the dismal theorem finally it discusses the issue of variable population

a dynamic analysis of human welfare in a warming planet anthropogenic greenhouse gas ghg emissions have caused atmospheric concentrations with no precedents in the last half a million years inducing serious uncertainties about future climates and their effects on human welfare recent climate science supports the view that the climate stabilization will require very low ghg emissions in the future we ask is a path of low emissions compatible with sustainable levels of human welfare with steady growth in human quality of life addressing these questions requires both defining welfare criteria and empirically estimating the possible paths of the economy we specify and calibrate a dynamic model with four intertemporal links education physical capital knowledge and the environment in line with nordhaus 2008a and with the stern review 2007 we assume that ghg emissions allow increased production while a higher stock of atmospheric carbon decreases production our index of human welfare which we call quality of life quol emphasizes education knowledge and the environment affected by greenhouse gas emissions in addition to consumption and leisure thus we avoid a consumptionist fallacy that welfare depends only on commodity consumption and perhaps leisure we reject discounted utilitarianism as a normative criterion and consider two alternatives the first is an intergenerational maximin criterion which maximizes the quality of life of the first generation subject to maintaining at least that level for all successive generations the second is human development optimization that seeks the maximization of the quol of the first generation subject to achieving a given constant rate of growth in all subsequent generations hence our analysis focuses on a human notion of sustainability as opposed to the conventional green sustainability limited to keeping the quality of the environment constant because our dynamic optimization programs defy explicit analytical solutions our approach has been computational as a benchmark we consider a simple model with physical and human capital for which we prove a turnpike theorem we then devise a computational algorithm inspired by the turnpike property to construct feasible although not necessarily optimal paths in the more complex and realistic model our analysis indicates that with ghg emission paths entailing very low emissions in the future positive rates of growth in quol are possible while the first generation experiences a quol higher than the historical reference level we also observe a tradeoff between the quality of life of the first generation and the rate of growth in the quality of life yet generation 1 s sacrifice for the sake of a higher growth rate appears to be small the paths that we compute involve investments in knowledge at noticeably higher levels than in the past

flexible exchange rates prices and the role of news lessons from the 1970s recent experience with flexible exchange rate systems has led to renewed interest in the operation of foreign exchange markets as reflected in many recent studies of the principal determinants of exchange rates the 1970s witnessed the dramatic alteration of the international monetary system from a regime of pegged exchange rates which prevailed for about a quarter of a century since the bretton woods conference into a regime of flexible though managed rates as a consequence of the emergence of the new legal and economic system traders national governments and international organisations were confronted with new economic problems choices and instruments during the 1970s ex change rates fluctuated widely and inflation rates accelerated the international monetary system had to accommodate extraordinarily large oil related shocks which affected trade flows in goods and assets huge oil payments had to be recycled uncertainties concerning future developments in international politics reached new heights and the prospects for the world economy got gloomier these developments placed unprecedented pressures on the markets for foreign exchange as well as on other asset markets they were associated with a large slide in the value of the us dollar and resulted in speeding up the creation of new institutions like the european monetary system which provided the formal framework for the management of exchange rates among members

numerical analysis of non constant pure rate of time preference a model of climate policy abstract when current decisions affect welfare in the far distant future as with climate change the use of a declining pure rate of time preference prtp provides potentially important modeling flexibility the difficulty of analyzing models with non constant prtp limits their application we describe and provide software available online to implement an algorithm to numerically obtain a markov perfect equilibrium for an optimal control problem with non constant prtp we apply this software to a simplified version of the numerical climate change model used in the stern review for our calibration the policy recommendations are less sensitive to the prtp than widely believed

models as usual for unusual risks on the value of catastrophic climate change we study the role of alternative intertemporal preference representations in a model of economic growth stock pollutant and endogenous risk of catastrophic collapse we contrast the traditional discounted utility model which assumes risk neutrality with respect to intertemporal utility with a multiplicative choice model that displays risk aversion in that dimension first we show that both representations of preferences can rationalize the same business as usual economy for a given interest rate and no pollution externality second once we introduce a collapse risk whose hazard rate is a function of the pollution stock multiplicative preferences recommend a much more stringent policy response an illustration in the context of climate change indicates that switching to the multiplicative preference representation has a similar effect in terms of policy recommendations as scaling up the schedule of the hazard rate by a factor of 100

between a rock and a soft place ecological and feminist economics in policy debates abstract the field of ecological economics includes both economic analysis on the one hand and discussions of normative values and visions for society on the other using feminist insights into cultural beliefs about the relative hardness and softness of these two sides this essay discusses how ecological economists can use this unique between space in order to better inform policy the current crisis of global climate change it is argued requires that economists move beyond modeling and measurement while ecological thinkers need to re examine beliefs about markets and profit

economists value judgments and climate change a view from feminist economics abstract a number of recent discussions about ethical issues in climate change as engaged in by economists have focused on the value of the parameter representing the rate of time preference within models of optimal growth this essay examines many economists antipathy to serious discussion of ethical matters and suggests that the avoidance of questions of intergenerational equity is related to another set of value judgments concerning the quality and objectivity of economic practice using insights from feminist philosophy of science and research on high reliability organizations this essay argues that a more ethically transparent real world oriented and flexible economic practice would lead to more reliable and useful knowledge

the trade off between intra and intergenerational equity in climate policy abstract this paper focuses on two equity dimensions of climate policy intra and intergenerational and analyzes the implications of equity preferences on climate policy and on the production and consumption patterns in rich and poor countries we develop a dynamic two region model in which each region suffers from global warming but also has an inequality aversion over current consumption allocations inequality aversion generally lifts the consumption path of the poor region while the rich region must take a greater share of the climate burden furthermore with inequality aversion the optimal climate policy generally leads to higher investment in clean capital in the north and in dirty capital in the south thereby allowing the south to pollute more and develop faster the optimal policy may even require the poor region to increase emissions relative to the uncoordinated business as usual case introducing local pollution and transfers confirm the main results

natural capital assets systems and policies natural capital is a concept whose time has come but is in danger of being greenwashed to suit vested interests as has happened to sustainability it is a hard concept based upon assets rather than utility natural capital assets provide the foundations for positive freedom by providing for future generations capabilities and choices this is especially the case for renewable natural capital which can provide nature s bounty forever provided the assets are not driven below critical thresholds natural capital assets lend themselves to accounting to balance sheets and risk registers and require capital maintenance cost benefit analysis being partial and on a project by project basis has a limited role since the natural environment comes in systems and is less amenable to marginal analysis three principles are core to the design of natural capital policies these are public goods with public monies polluter pays and compensation in the form of net environmental gain

correcting the climate externality pareto improvements across generations and regions many argue that the present generation must reduce consumption to mitigate future climate change however as significant climate change is due to market failure the correction of market failures by definition gives rise to the possibility of pareto improvements in this paper we examine the implications of pareto improvements both within and across generations we employ the representative consumer model rice 10 a global model including different regions to see how we could potentially distribute any benefits across and within generations such that nobody loses the model shows that different combinations of present and future consumption along the pareto improving frontier yield different combinations of capital investment and emissions we also calculate a conventional social optimum while the social optimum by definition is on the pareto efficiency frontier it is not necessarily on the pareto improving segment of this frontier total emissions and hence temperature change vary significantly across different pareto improving scenarios it obviously matters which generations get the utility gain and one of our results is that for pareto improvements where none of the gain goes to the distant future and allowing transfers total emissions will be higher than in the social optimum even without any welfare gain to the distant future total emissions may be lower in the pareto improving scenarios we have considered than under the social optimum if transfers are not permitted moreover in this case carbon taxes differ substantially across regions for all pareto improvements

benefit cost analysis of non marginal climate and energy projects conventional benefit cost analysis incorporates the normally reasonable assumption that the policy or project under examination is marginal among the assumptions this entails is that the policy or project is small so the underlying growth rate of the economy does not change however this assumption may be inappropriate in some important circumstances including in climate change and energy policy one example is global targets for carbon emissions while another is a large renewable energy project in a small economy such as a hydropower dam this paper develops some theory on the evaluation of non marginal projects with empirical applications to climate change and energy we examine the conditions under which evaluation of a non marginal project using marginal methods may be wrong and in our empirical examples we show that both qualitative and large quantitative errors are plausible

the economics of the climate i review the economic characteristics of the climate problem focusing on the choice of discount rates in the presence of a stock externality risk and uncertainty ambiguity and the role of integrated assessment models iams in analyzing policy choices i suggest that iams can play a role in providing qualitative understanding of how complex systems behave but are not accurate enough to provide quantitative insights arguments in favor of action on climate issues have to be based on aversion to risk and ambiguity and the need to avoid a small but positive risk of a disastrous outcome

sustainable management of fossil fuels a dynamic stochastic optimization approach with jump diffusion abstract this paper deals with a relevant aspect of energy modeling i e fossil fuels management the issue is faced by using purely operational research techniques which are suitable in this context in particular a dynamic stochastic optimization model is developed to optimally determine use and stock of resources to be employed in consumption and investments in a wide economic sense human and physical capital r d etc it is assumed that a sustainability criterion drives the optimality rules i e decisions are also grounded on the well being of future generations the policymaker maximizes an aggregated intergenerational expected utility under the dilemma of present consumption conservation of natural resources for the future in reference to standard environmental economic theory jump diffusion dynamics for the stock of natural resources and infinite time horizon are assumed extensive numerical experiments complete the analysis and contribute to determine fossil fuels management policies showing that long term investments make the difference for the well being of present and future generations

justifying precautionary policies incommensurability and uncertainty abstract when decisions are taken in conditions of keynesian or knightian uncertainty and when there is a threat of serious or irreversible environmental damage the precautionary principle is often recommended to guide decision making however the precautionary principle has been widely criticised in response to these criticisms a qualitative version of the precautionary principle is developed which draws its normative content from a blend of formal decision theory and political philosophy it is argued that precautionary action can be justified by some flexible combination of uncertainty and incommensurability the greater the uncertainty the less incommensurability is required to justify precautionary action and vice versa throughout the paper the arguments are explored using the example of climate change decision problems

agriculture and global climate stabilization a public good analysis the stabilization of global climate presents one of the most complex problems in public good provision the world has faced continuation of business as usual policies leading to warming of more than 2 degrees over the next year will produce significant damage to agricultural systems and catastrophic damage to the natural ecosystems that ultimately support agriculture the best solution to the public goods problem is a contract and converge agreement in which the ultimate outcome is a common global entitlement to co 2 emissions per person

floating exchange rates expectations and new information abstract this paper analyzes the relationship between forward exchange rates future spot rates and new information a stochastic model of exchange rate determination is used to formally show how unanticipated changes in the exchange rate determinants or news affect the spot rate the empirical analysis indicates that new information plays an important role in explaining the market forecasting error or difference between the spot rate and the forward rate determined in the previous period

a quantitative minimax regret approach to climate change does discounting still matter abstract using cost benefit analysis to determine an optimal climate mitigation target is criticised especially because i it fails to sufficiently take into account low probability high impact events and ii results strongly depend on the discount rate used one of the alternative suggestions to inform policymakers about the right mitigation target that does take the risks associated with low probability high impact events explicitly into account is the minimax regret criterion we apply the minimax regret criterion quantitatively using an integrated assessment model with extreme values for climate sensitivity damage estimates and mitigation costs the goal is to analyse whether such a method leads to different results compared to standard cost benefit analysis and whether the results are still sensitive to the discount rate used we find that the minimax regret approach leads to more stringent and robust climate targets for relatively low discount rates and if both a high climate sensitivity and high damage estimates are assumed if one of these assumptions does not hold the difference between the minimax regret approach and standard cost benefit analysis is much smaller therefore we conclude that the discount rate used can still be of vital importance even when applying a minimax regret approach

the pound sterling us dollar exchange rate and the new abstract the theory that the exchange rate responds to the news content of the fundamental variables is tested the innovations in the monetary approach variables are proxied by arima residuals and the reduced form equation for the exchange rate is fitted by 2sls

justifying social discounting the rank discounted utilitarian approach the popular discounted utilitarian criterion for infinite horizon social choice has been criticized on the ground that it treats successive generations unfairly i propose to evaluate intergenerational welfare with a rank discounted utilitarian rdu criterion instead the criterion amounts to discounted utilitarianism on non decreasing paths but it treats all generations impartially discounting becomes the mere expression of intergenerational inequality aversion i show that more inequality averse rdu societies have higher social discount rates when future generations are better off i apply the rdu approach in two benchmark economic growth models and i prove that it promotes sustainable policies maximizing discounted utility

growth and competition in renewable energy industries insights from an integrated assessment model with strategic firms abstract this article describes the development implementation and application of an integrated assessment modeling framework featuring renewable technology markets with producers engaged in cournot competition scenario results reveal how climate policy and inter firm learning spillovers interact with market structure to affect wind and solar pv prices adoption producer profits and carbon emissions competitive markets yield consistently lower markups than concentrated markets leading to significantly more adoption and lower emissions widespread solar pv adoption is a key component of the largest emissions reductions but this requires substantial price reductions that only occur if the solar pv market is competitive and learning spills over across producers whether a leading firm has a profit incentive to facilitate or obstruct learning spillovers depends on the availability of cost competitive substitute technologies if such a substitute exists the firm prefers strong spillovers that help its industry compete against the substitute if not the firm prefers weak spillovers that prevent competitors in its industry from seizing market share the relationship between price and cumulative capacity is endogenous in the modeling framework regression analysis of scenario results yields price learning rates which are similar to unit production cost learning rates in competitive markets but substantially lower even negative in concentrated markets

transboundary pollution game with potential shift in damages abstract complex systems exposed to pollution may suddenly and permanently shift to a dangerous regime this paper studies a dynamic game among countries that face the prospect of such a shift each country derives some flow utility from its own emissions which are chosen unilaterally but flow emissions by all countries increase the pollution stock in the world in addition to generating global damages such as global warming the pollution stock may trigger an irreversible and abrupt jump in global damages or catastrophe at an unknown date in the future we ask whether endogenous and exogenous threats of such a jump in damages or catastrophe mitigate the tragedy of the commons and examine their implications on welfare our analysis yields different emission responses to these threats as compared to the related literature that focuses only on the single polluter case for example when the hazard rate is exogenous and countries commit to nonlinear strategies we find that the threat of a possible jump in damages or catastrophe may induce a lower or larger emission level and initial welfare due to multiple equilibria these results are maintained when the hazard rate endogenously depends on emission decisions

the impact of climate change on the balanced growth equivalent an application of fund the stern review added balanced growth equivalents bge to the economic climate change research agenda we first propose rigorous definitions of the bge for multiple regions and under uncertainty we show that the change in the bge is independent of the assumed scenario of per capita income for comparable welfare economic assumptions as the stern review we calculate lower changes in bge between a business as usual scenario and one without climate impacts with the model fund than the stern review found with the model page we find that mitigation policies give even lower changes in bge and argue that those policy choices should be the focus of the research effort rather than total damage estimates according to our results the current carbon tax should be below 55 tc sensitivity analyses show that the stern review chose parameters that imply high impact estimates however for regionally disaggregated welfare functions we find changes in bge that are significantly higher than the results from the stern review both for total damage as for policy analysis with regional disaggregation and high risk aversion we observe fat tails and with that very high welfare losses

a review of the stern review on the economics of climate change how much and how fast should we react to the threat of global warming the stern review argues that the damages from climate change are large and that nations should undertake sharp and immediate reductions in greenhouse gas emissions an examination of the review s radical revision of the economics of climate change finds however that it depends decisively on the assumption of a near zero time discount rate combined with a specific utility function the review s unambiguous conclusions about the need for extreme immediate action will not survive the substitution of assumptions that are consistent with today s marketplace real interest rates and savings rates

banking on the boom tripped by the bust banks and the world war i agricultural price shock bank lending booms and asset price booms are often intertwined although a fundamental shock might trigger an asset boom aggressive lending can push asset prices higher leading to more lending and so on such a dynamic seems to have characterized the agricultural land boom surrounding world war i this paper examines i how banks responded to the asset price boom and how they were affected by the bust ii how various banking regulations and policies influenced those effects and iii how bank lending contributed to rising farm land values in the boom and how bank closures contributed to falling prices in the bust we find that rising crop prices encouraged bank entry and balance sheet expansion in agriculture counties state deposit insurance systems amplified the impact of rising crop prices on the size and risk of bank portfolios while higher minimum capital requirements dampened the effects further increases in county farm land values and mortgage debt were correlated with the number of local banks ex ante and increases in bank loans during the boom when farm land prices collapsed banks that had responded most aggressively to the asset boom had a higher probability of closing while counties with more bank closures experienced larger declines in land prices than can be explained by falling crop prices alone

climate change policy why has so little been achieved while the scientific evidence for climate change grows the policy responses have so far had little or no impact on the build up of emissions current trends in emissions are adverse the paper considers why the disconnect between science and policy exists and in particular why the kyoto protocol has achieved so little some contributing factors considered are the focus on carbon production rather than consumption in the architecture of kyoto the flaws in the analysis presented in the stern report notably on the impacts of climate change on economic growth on the costs of mitigation and on discounting and the political economy of the choice of policy instruments the politics of the rents that arise and the technology bias the challenges facing the copenhagen conference are noted and it is concluded that with a recasting of the economics of climate change the prospects for closing the gap between the science and policy are grim

on modeling and interpreting the economics of catastrophic climate change with climate change as prototype example this paper analyzes the implications of structural uncertainty for the economics of low probability high impact catastrophes even when updated by bayesian learning uncertain structural parameters induce a critical tail fattening of posterior predictive distributions such fattened tails have strong im plications for situations like climate change where a catastrophe is theoretically possible because prior knowledge cannot place sufficiently narrow bounds on overall damages this paper shows that the economic consequences of fat tailed structural uncertainty along with unsureness about high temperature damages can readily outweigh the effects of discounting in climate change policy analysis

on the collapse of historical civilizations to explain the collapse of historical civilizations scholars typically point to suboptimal behaviors including misunderstanding the natural environment shortsightedness or a lack of institutions we examine the collapse of four historical societies with a model of endogenous population growth and renewable resources employing components of optimal resource management economic growth theory and the moral philosophy of social welfare function choice we find that these collapses may have been socially optimal further we show that the transient behavior of the system is more sensitive to assumptions than the equilibrium behavior and that focusing solely on equilibria may miss key insights copyright 2009 oxford university press

the reaction of exchange rates to economic news this paper examines the short run responses of spot exchange rates to several types of economic news survey data are used to divide economic announcements into expected and unexpected components with the latter measuring news the results indicate that exchange rates are systematically related to unexpected money announcements after the october 1979 switch in federal reserve operating procedures but not before this response does not appear to have changed however after the october 1982 federal reserve regime change short run exchange rate movements are not systematically related to news on inflation or real activity

social discounting under uncertainty a cross country comparison recent research suggests that social cost benefit analysis should be conducted with a declining discount rate for instance newell and pizer discounting the distant future how much do uncertain rates increase valuations j environ econ manage 46 2003 52 71 show that the us certainty equivalent discount rate declines through time using a simple autoregressive model of us interest rates this paper extends that line of research estimating both autoregressive and regime switching models of real interest rates to determine certainty equivalent discount rates in australia canada germany and the uk it is found that the regime switching model is a better model of past interest rate behavior for all four countries this model tends to produce a more rapid decline in certainty equivalent discount rates the paper provides applications to the economics of climate change and nuclear power

time perspective and climate change policy the tendency to foreshorten time units as we peer further into the future provides an explanation for hyperbolic discounting at an inter generational time scale we study implications of hyperbolic discounting for climate change policy when the probability of a climate induced catastrophe depends on the stock of greenhouse gasses we characterize the set of markov perfect equilibria mpe of the inter generational game amongst a succession of policymakers each policymaker reflects her generation s preferences including its hyperbolic discounting for a binary action game we compare the mpe set to a restricted commitment benchmark we compare the associated constant equivalent discount rates and the willingness to pay to control climate change with assumptions and recommendations in the stern review on climate change ymy picture of the world is drawn in perspectivey i apply my perspective not merely to space but also to time ramsey

endogenous discounting and climate policy under risk of abrupt climate change the occurrence hazard is added to the social discount rate as a result the social discount rate 1 increases and 2 turns endogenous to the global warming policy the second effect bears profound policy implications that are magnified by economic growth in particular we find that greenhouse gases ghg emission should be terminated at a finite time so that the ensuing occurrence risk will vanish in the long run due to the public bad nature of the catastrophic risk the second effect is ignored in a competitive allocation and unregulated economic growth will give rise to excessive emissions in the long term the ghg emission paths under the optimal and competitive growth regimes lie at the extreme ends of the range of feasible emissions