Costing and pricing the planet… Mainly drawn from Stern Review report, notably chapters 2A and 6...
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Transcript of Costing and pricing the planet… Mainly drawn from Stern Review report, notably chapters 2A and 6...
Costing and pricing the planet…Mainly drawn from Stern Review report, notably chapters 2A and 6
Scenario (e.g. Business as Usual OR a stabilisation level)
Attribute values to these
Project future levels of economic activity and social benefits
Factor these in ‘present day’ terms = Discounting
Utility today
Total utility
Compare scenarios
Implement best
Conventional (market) discounting
receipts at time into future:
value today (0) ( )i i
i ii
y t
U D t y
0( ') '
Discount factor
( ) constant discount rate
non-constant
equivalently ( ) /
t
rt
r t dt
D t e r
e
r t D D
Standard market-based assertion:
( ) risk free interest rate
(assuming payments net of risk)
r t
assumes there is some larger market against which to trade!
Dis
cou
nt f
acto
r Uncertainty as to discount rate
Take average of discount factor
equivalent todecreasing discount rate with time
Cf UK Treasury ‘green book’
Stern Approach (more proposed than implemented)1. The human race might not survive anyway:
nuclear holocaust, asteroid impact, supervolcanoes ….
%
No other discounting – controversial
3. Results generally expressed as equivalent permanent reduction in GDP
2. Rate future gains/losses relative to the size of future economy
( )( ) ( ) ln ( )
( )t t
dC tdU D t U D t C t
C t