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Discounting in the Presence of Scarce Ecosystem Services

Author

Listed:
  • Xueqin Zhu
  • Sjak Smulders
  • Aart de Zeeuw
Abstract
Discounting has to take account of ecosystem services in consumption and production. Previous literature focuses on the first aspect and shows the importance of the relative price effect, for given growth rates of consumption and ecosystem services. This paper focuses on intermediate ecosystem services in production and shows that for limited substitutability and a low growth rate of these ecosystem services, the growth rate of consumption, and thus the discount rate, declines towards a low value. Using a Ramsey optimal-growth framework, the paper distinguishes three cases. If ecosystem services can be easily substituted, then the discount rate converges to the usual value in the long term. Secondly, if ecosystem services can be easily substituted in production but not in consumption, the relative price effect is important. Finally, and most interestingly, if ecosystem services cannot be easily substituted in production, the discount rate declines towards a low value and the relative price effect is less important. Another part of the previous literature has shown that a declining discount rate is the result of introducing several forms of uncertainty, but this paper reaches that conclusion from an endogenous effect on the growth rate of the economy.

Suggested Citation

  • Xueqin Zhu & Sjak Smulders & Aart de Zeeuw, 2019. "Discounting in the Presence of Scarce Ecosystem Services," CESifo Working Paper Series 7514, CESifo.
    • Handle: RePEc:ces:ceswps:_7514
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    References listed on IDEAS

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    Cited by:

    1. Moritz A. Drupp & Martin C. Hänsel, 2021. "Relative Prices and Climate Policy: How the Scarcity of Nonmarket Goods Drives Policy Evaluation," American Economic Journal: Economic Policy, American Economic Association, vol. 13(1), pages 168-201, February.
    2. Rick Van der Ploeg, 2020. "Discounting And Climate Policy," OxCarre Working Papers 244, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
    3. van der Ploeg, Frederick & Rezai, Armon, 2021. "Optimal carbon pricing in general equilibrium: Temperature caps and stranded assets in an extended annual DSGE model," Journal of Environmental Economics and Management, Elsevier, vol. 110(C).
    4. Jarisch, Isabelle & Bödeker, Kai & Bingham, Logan Robert & Friedrich, Stefan & Kindu, Mengistie & Knoke, Thomas, 2022. "The influence of discounting ecosystem services in robust multi-objective optimization – An application to a forestry-avocado land-use portfolio," Forest Policy and Economics, Elsevier, vol. 141(C).
    5. Jonas Heckenhahn & Moritz A. Drupp, 2024. "Relative Price Changes of Ecosystem Services: Evidence from Germany," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 87(3), pages 833-880, March.
    6. Cees A. Withagen, 2018. "The Social Cost of Carbon and the Ramsey Rule," CESifo Working Paper Series 7359, CESifo.
    7. Antonio Nesticò & Gabriella Maselli & Patrizia Ghisellini & Sergio Ulgiati, 2023. "A Dual Probabilistic Discounting Approach to Assess Economic and Environmental Impacts," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 85(1), pages 239-265, May.
    8. Jasper N. Meya & Stefan Baumgärtner & Moritz A. Drupp & Martin F. Quaas, 2020. "Inequality and the Value of Public Natural Capital," CESifo Working Paper Series 8752, CESifo.
    9. Moritz A. Drupp & Zachary M. Turk & Ben Groom & Jonas Heckenhahn, 2023. "Global evidence on the income elasticity of willingness to pay, relative price changes and public natural capital values," Papers 2308.04400, arXiv.org, revised Nov 2024.

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    More about this item

    Keywords

    discount rate; ecosystem services; consumption value; production value; growth rate; Ramsey optimal balanced growth;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • O44 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Environment and Growth
    • Q57 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Ecological Economics

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