Now or Never: Environmental Protection under Hyperbolic Discounting

The author analyzes the optimal investment in environmental protection in a model of non-overlapping hyperbolically discounting agents. He shows that, in the long run and in the absence of a commitment device, society is stuck in a situation where all agents prefer further investments, yet no agent invests. This holds no matter whether agents are aware of the time inconsistency of their preferences. As a consequence, awareness of the time-inconsistency problem poses at best a short run remedy. Moreover, such an outcome may be Pareto inefficient and may explain the weak performance of long-run environmental policies. Special issue “Discounting the Long-Run Future and Sustainable Development

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Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract This paper uses a theoretical model with Directed Technical Change to analyse the observed heterogeneous energy intensity developments. Based on the empirical evidence on the underlying drivers of energy intensity developments, we decompose changes in aggregate energy intensity into structural changes in the economy (Sector Effect) and within-sector energy efficiency improvements (Efficiency Effect). We analyse how energy price growth and the relative productivity of both sectors affect the direction of research and hence the relative importance of the aforementioned two effects. The relative importance of these effects is determined by energy price growth and relative sector productivity that drive the direction of research. In economies that are relatively more advanced in sectors with low energy intensities, the Sector Effect dominates energy intensity dynamics given no or moderate energy price growth. In contrast, the Efficiency Effect dominates energy intensity developments in economies with a high relative technological level within their energy-intensive industries if moderate energy price growth is above a certain threshold. We further show that temporal energy price shocks might induce a permanent redirection of innovation activities towards sectors with low-energy intensities. Terms of use: Documents in Keywords: directed technical change, energy efficiency, energy intensity, structural change. JEL-Classification: O33, Q43, Q55. * We thank Jürgen Meckl, Ulf Moslener, Jana Brandt, Lothar Grall, Matthias Greiff, and the participants of the 9th MAGKS Colloquium (Marburg) for fruitful comments