Scandinavian Working Papers in Economics
Working Papers in Economics,
University of Gothenburg, Department of Economics
No 305: The Behavioural Economics of Climate Change
Kjell Arne Brekke () and Olof Johansson-Stenman ()
Additional contact information
Kjell Arne Brekke: Department of Economics, University of Oslo, Postal: P.O. Box 1095, Blindern, NO-0317 Oslo, Norway
Olof Johansson-Stenman: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: Göteborg University, Box 640, SE 40530 GÖTEBORG
Abstract: This paper attempts to bring some central insights from behavioural economics into the economics of climate change. In particular, it discusses (i) implications of prospect theory, the equity premium puzzle and time inconsistent preferences in the choice of discount rate used in climate change cost assessments, and (ii) the implications of various kinds of social preferences for the outcome of climate negotiations. Several reasons are presented for why it appears advisable to choose a substantially lower social discount rate than the average return on investments. It also seems likely that taking social preferences into account increases the possibilities of obtaining international agreements, compared to the standard model. However, there are also effects going in the opposite direction, and the importance of sanctions is emphasised.
Keywords: Behavioural economics; prospect theory; equity premium puzzle; social preferences; climate negotiations.
29 pages, May 19, 2008
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