Climate change and short-run discount rates
by Sunderasan Srinivasan
International Journal of Green Economics (IJGE), Vol. 11, No. 2, 2017

Abstract: Climate-conscious action initiated at the present has the potential to impact welfare consequences into the distant future. Market discount/interest rates help determine time-preference patterns for individuals; yet, such rates do not help compare the dis/utility derived by different contemporaneous individuals, or of economic agents living generations apart. Researchers and activists have advocated low to zero discounting of future environmental benefits from present-day investments. Contrary to most implicit assumptions, and despite projected technological advances and higher money incomes, once depleted, natural capital is not substitutable. Subsidising relatively 'sustainable' production often generates perverse incentives and sets arbitrage opportunities up. This paper argues that unsustainable production should be discounted at higher rates to internalise the externality, to eliminate the present-bias, and to achieve the desired indifference between short-run and medium-term returns. The model parameter verdurous β so developed is applied to demonstrate the incentive structures that might promote the switch to 100% organic coffee production in Rwanda.

Online publication date: Wed, 03-Jan-2018

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