RT Journal Article
SR Electronic
T1 Discounting and Uncertainty in Climate Change Policy Analysis
JF Land Economics
JO Land Econ
FD University of Wisconsin Press
SP 369
OP 381
DO 10.2307/3147023
VO 79
IS 3
A1 Howarth, Richard B.
YR 2003
UL http://le.uwpress.org/content/79/3/369.abstract
AB Economic studies of climate change commonly discount the future at a rate equal to the long-run return on corporate stocks. Stock market returns, however, are dominated by a risk premium, while climate change mitigation measures would reduce important risks to future welfare. Drawing on the theory of investment behavior under uncertainty, this paper argues that the benefits of climate stabilization policies should be discounted at a rate equal to the annual return on risk-free financial assets, which attains an empirical value between 0 and 2.6%. In addition, expected benefits must be adjusted to account for the value of risk abatement. (JEL Q21)