A New Look into the Determinants of the Ecological Discount Rate: Disentangling Social Preferences

Luciana Echazu 1 , 1 , Diego Nocetti 2 , 2  and William T. Smith 3 , 3
  • 1 Clarkson University, lechazu@clarkson.edu
  • 2 Clarkson University, dnocetti@clarkson.edu
  • 3 University of Memphis, wtsmith@memphis.edu

Abstract

How should changes in environmental quality occurring in the future be discounted? To answer this question we consider a model of “ecological discounting”, where the representative consumer has a utility function defined over two attributes, consumption and environmental quality, which evolve stochastically over time. We characterize the determinants of the social discount rate and its behavior over time using a preference structure that disentangles attitudes towards intertemporal inequality, attitudes towards risk, and tastes over consumption and environmental quality. We show that the degree of substitutability between consumption and environmental quality, the degree of risk aversion, the degree of inequality aversion, and the rate at which these attitudes change as natural and man-made resources evolve over time are all important aspects of the ecological discount rate and its term structure. Our analysis suggests that over medium and long term horizons the ecological discount rate should be below the rate of time preference, supporting recent proposals for immediate action towards climate change mitigation.

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The B.E. Journal of Economic Analysis & Policy (BEJEAP) is an international forum for scholarship that employs microeconomics to analyze issues in business, consumer behavior and public policy. Topics include the interaction of firms, the functioning of markets, the effects of domestic and international policy and the design of organizations and institutions.

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