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Article

Discounting and Climate Policy  

Frederick van der Ploeg

The social rate of discount is a crucial driver of the social cost of carbon (SCC), that is, the expected present discounted value of marginal damages resulting from emitting one ton of carbon today. Policy makers should set carbon prices to the SCC using a carbon tax or a competitive permits market. The social discount rate is lower and the SCC higher if policy makers are more patient and if future generations are less affluent and policy makers care about intergenerational inequality. Uncertainty about the future rate of growth of the economy and emissions and the risk of macroeconomic disasters (tail risks) also depress the social discount rate and boost the SCC provided intergenerational inequality aversion is high. Various reasons (e.g., autocorrelation in the economic growth rate or the idea that a decreasing certainty-equivalent discount rate results from a discount rate with a distribution that is constant over time) are discussed for why the social discount rate is likely to decline over time. A declining social discount rate also emerges if account is taken from the relative price effects resulting from different growth rates for ecosystem services and of labor in efficiency units. The market-based asset pricing approach to carbon pricing is contrasted with a more ethical approach to policy making. Some suggestions for further research are offered.

Article

The Economics of Diet and Obesity: Public Policy  

Fabrice Etilé

The rise in obesity and other food-related chronic diseases has prompted public-health officials of local communities, national governments, and international institutions to pay attention to the regulation of food supply and consumer behavior. A wide range of policy interventions has been proposed and tested since the early 21st century in various countries. The most prominent are food taxation, health education, nutritional labeling, behavioral interventions at point-of-decision, advertising, and regulations of food quality and trade. While the standard neoclassical approach to consumer rationality provides limited arguments in favor of public regulations, the recent development of behavioral economics research extends the scope of regulation to many marketing practices of the food industry. In addition, behavioral economics provides arguments in favor of taxation, easy-to-use front-of-pack labels, and the use of nudges for altering consumer choices. A selective but careful review of the empirical literature on taxation, labeling, and nudges suggests that a policy mixing these tools may produce some health benefits. More specifically, soft-drink taxation, front-of-pack labeling policies, regulations of marketing practices, and eating nudges based on affect or behavior manipulations are often effective methods for reducing unhealthy eating. The economic research faces important challenges. First, the lack of a proper control group and exogenous sources of variations in policy variables make evaluation very difficult. Identification is challenging as well, with data covering short time periods over which markets are observed around slowly moving equilibria. In addition, truly exogenous supply or demand shocks are rare events. Second, structural models of consumer choices cannot provide accurate assessment of the welfare benefits of public policies because they consider perfectly rational agents and often ignore the dynamic aspects of food decisions, especially consumer concerns over health. Being able to obtain better welfare evaluation of policies is a priority. Third, there is a lack of research on the food industry response to public policies. Some studies implement empirical industrial organization models to infer the industry strategic reactions from market data. A fruitful avenue is to extend this approach to analyze other key dimensions of industrial strategies, especially decisions regarding the nutritional quality of food. Finally, the implementation of nutritional policies yields systemic consequences that may be underestimated. They give rise to conflicts between public health and trade objectives and alter the business models of the food sector. This may greatly limit the external validity of ex-ante empirical approaches. Future works may benefit from household-, firm-, and product-level data collected in rapidly developing economies where food markets are characterized by rapid transitions, the supply is often more volatile, and exogenous shocks occur more frequently.

Article

The Role of Uncertainty in Controlling Climate Change  

Yongyang Cai

Integrated assessment models (IAMs) of the climate and economy aim to analyze the impact and efficacy of policies that aim to control climate change, such as carbon taxes and subsidies. A major characteristic of IAMs is that their geophysical sector determines the mean surface temperature increase over the preindustrial level, which in turn determines the damage function. Most of the existing IAMs assume that all of the future information is known. However, there are significant uncertainties in the climate and economic system, including parameter uncertainty, model uncertainty, climate tipping risks, and economic risks. For example, climate sensitivity, a well-known parameter that measures how much the equilibrium temperature will change if the atmospheric carbon concentration doubles, can range from below 1 to more than 10 in the literature. Climate damages are also uncertain. Some researchers assume that climate damages are proportional to instantaneous output, while others assume that climate damages have a more persistent impact on economic growth. The spatial distribution of climate damages is also uncertain. Climate tipping risks represent (nearly) irreversible climate events that may lead to significant changes in the climate system, such as the Greenland ice sheet collapse, while the conditions, probability of tipping, duration, and associated damage are also uncertain. Technological progress in carbon capture and storage, adaptation, renewable energy, and energy efficiency are uncertain as well. Future international cooperation and implementation of international agreements in controlling climate change may vary over time, possibly due to economic risks, natural disasters, or social conflict. In the face of these uncertainties, policy makers have to provide a decision that considers important factors such as risk aversion, inequality aversion, and sustainability of the economy and ecosystem. Solving this problem may require richer and more realistic models than standard IAMs and advanced computational methods. The recent literature has shown that these uncertainties can be incorporated into IAMs and may change optimal climate policies significantly.