The Impacts and Costs of Climate Change Page: 33
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The Impacts and Costs of Climate Change
Key Choices in Determining the Values (Benefits)
There is another key element to the estimates of the costs of climate change. This lies in the choice of
a number of key assumptions. Indeed, much of the variation in estimates arise from a few key
parameters in the choice of decision perspectives, most importantly:
* Discount rate used;
* Approach to weighting impacts in different regions (equity weighting);
* The time period of emissions;
* Study time-horizon;
* Strong or weak sustainability approach;
* Ancillary benefits.
These parameters are discussed below.
As impacts of climate change take place in the future, the discount rate used is of major importance.
The discount rate39 (see box) used can have an extremely large impact on the social cost of carbon.
Many of the earlier studies are based on studies that use a 1% or 3% discount rate40. The difference
between these two discount rates has a dramatic impact on the value; for example, using the original
ExternE result, a switch from a 3% discount rate to 1% rate increases the central value from Euro
20/tCO2 (3% d.r.) to 44/tCO2 (1% d.r.)41
Most impact assessment modelling studies present results in terms of the pure rate of time preference
(PRTP), as this is the fundamental parameter. The social rate of time preference is given by the pure
rate of time preference plus the per capita GDP growth rate multiplied by the negative of the elasticity
of utility with respect to consumption, which is a parameter used to determine the equity weights. This
also allows the use of different growth rates in different regions, an important aspect for non-OECD
analysis. When studies use a PRTP of 0%, they are still discounting but only to account for the extra
wealth that future generations will enjoy.
39 'Discounting is a technique used to compare costs and benefits that occur in different time periods. It is a separate concept
from inflation, and is based on the principle that, generally, people prefer to receive goods and services now rather than
later..... The discount rate is used to convert all costs and benefits to 'present values', so that they can be compared.'.
Source: UK HMTreasury Green Book.
40 The discount rate here refers to the use of the social time preference rate (STPR).
41 The ExternE values are reported by Eyre et al. (1999)
AEA Technology Environment, August 2005
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Watkiss, Paul; Downing, Tom; Handley, Claire & Butterfield, Ruth. The Impacts and Costs of Climate Change, text, September 2005; Oxford, England. (digital.library.unt.edu/ark:/67531/metadc29337/m1/44/: accessed April 27, 2017), University of North Texas Libraries, Digital Library, digital.library.unt.edu; .