A Proposal for a New Prescriptive Discounting Scheme: The Intergenerational Discount Rate

Cost-benefit analyses require comparing costs and benefits that occur at different points in time. Doing so, however, creates conflicts between short-term considerations — a discounting scheme has to be consistent with observed behaviours — and long-term ethical issues — a discounting scheme must not favour the current generation over future ones. To overcome this conflict, the present article proposes a prescriptive consumption discounting scheme that applies different discount rates (i) for various incomes in the lifetime of a unique individual and (ii) for various incomes that affect different individuals. Practically, any income flux is first discounted to the birth date of all individuals using a discount rate with a non-zero pure preference for the present; then these individual discounted values are discounted to the present with a discount rate with no preference for the present and finally summed up. The aim of this prescriptive discount rate is to be consistent with observed individual behaviour (descriptive discount rate) without favouring current generations. Consequences are discussed and compared with the UK Green Book and the Stern Review discounting schemes.Discount Rate, Intergenerational Equity

Accounting for Extreme Events in the Economic Assessment of Climate Change

Extreme events are one of the main channels through which climate and socio- economic systems interact. It is likely that climate change will modify their probability distributions and their consequences. The long-term growth models used in climate change assessments, however, cannot capture the effects of short-term shocks; they thus model extreme events in a very crude manner. To assess the importance of this limitation, a non-equilibrium dynamic model (NEDyM) is used to model the macroeconomic consequences of extreme events. Its conclusions are the following: (i) Dynamic processes multiply the extreme event direct costs by a factor 20; half of this increase comes from short-term processes; (ii) A possible modication of the extreme event distribution due to climate change can be responsible for significant GDP losses; (iii) The production losses caused by extreme events depend, with strong non-linearity, both on the changes in the extreme distribution and on the ability to fund the rehabilitation after each disaster. These conclusions illustrate that the economic assessment of climate change does not only depend on beliefs on climate change but also on beliefs on the economy. Moreover, they suggest that averaging short-term processes like extreme events over the five- or ten-year time step of a classical long-term growth model can lead to inaccurately low assessments of the climate change damages.Climate change, Extreme events, Economic impacts

Behaviors and housing inertia are key factors in determining the consequences of a shock in transportation costs

This paper investigates the consequences of a sudden increase in transportation costs when households behaviors and buildings inertia are accounted for. A theoretical framework is proposed, capturing the interactions between behaviors, transportation costs and urban structure. It is found that changes in households consumption and housing choices reduce significantly the long-term adverse effects of a shock in transportation costs. Indeed, the shock translates, over the long-run, into a more concentrated housing that limits households utility losses and maintains landowners' income. But, because of buildings inertia, the shock leads first to a long transition, during which the adjustment is constrained by a suboptimal housing-supply structure. Then, households support larger losses than in the final stage, though lower than with no adjustment at all, and landowners experience a large decrease in their aggregate income and an important redistribution of wealth. Negative transitional effects grow as the shock becomes larger. Thus, behaviors and buildings inertia are key factors in determining the vulnerability to transportation price variability and to the introduction of climate policies. Our policy conclusions are that: (i) if a long-term increase in transportation costs is unavoidable because of climate change or resource scarcity, a smooth change, starting as early as possible, must be favored; and (ii) fast-growing cities of the developing world can reduce their future vulnerability to shocks in transportation costs through the implementation of policies that limit urban sprawl.City, Housing, Transportation

The Economics of Natural Disasters

Naturkatastrophe; Soziale Kosten; Messung; Prognoseverfahren; Theorie

Compact or Spread-Out Cities: Urban Planning, Taxation, and the Vulnerability to Transportation Shocks

This paper shows that cities made more compact by transportation taxation are more robust than spread-out cities to shocks in transportation costs. Such a shock, indeed, entails negative transition effects that are caused by housing infrastructure inertia and are magnified in low-density cities. Distortions due to a transportation tax, however, have in absence of shock detrimental consequences that need to be accounted for. The range of beneficial tax levels can, therefore, be identified as a function of the possible magnitude of future shocks in transportation costs. These taxation levels, which can reach significant values, reduce city vulnerability and prevent lock-ins in under-optimal situations.Urban transportation, Housing, Inertia, Vulnerability, Transportation Taxation

Endogenous Business Cycles and the Economic Response to Exogenous Shocks

In this paper, we investigate the macroeconomic response to exogenous shocks, namely natural disasters and stochastic productivity shocks. To do so, we make use of an endogenous business cycle model in which cyclical behavior arises from the investment–profit instability; the amplitude of this instability is constrained by the increase in labor costs and the inertia of production capacity and thus results in a finite-amplitude business cycle. This model is found to exhibit a larger response to natural disasters during expansions than during recessions, because the exogenous shock amplifies pre-existing disequilibria when occurring during expansions, while the existence of unused resources during recessions allows for damping the shock. Our model also shows a higher output variability in response to stochastic productivity shocks during expansions than during recessions. This finding is at odds with the classical real-cycle theory, but it is supported by the analysis of quarterly U.S. Gross Domestic Product series; the latter series exhibits, on average, a variability that is 2.6 times larger during expansions than during recessions.Business cycles, Natural disasters, Productivity shocks, Output variability

Assessing the Consequences of Natural Disasters on Production Networks: A Disaggregated Approach

This article proposes a framework to investigate the consequences of natural disasters. This framework is based on the disaggregation of Input-Output tables at the business level, through the representation of the regional economy as a network of production units. This framework accounts for (i) limits in business production capacity; (ii) forward propagations through input shortages; and (iii) backward propagations through decreases in demand. Adaptive behaviors are included, with the possibility for businesses to replace failed suppliers, entailing changes in the network structure. This framework suggests that disaster costs depend on the heterogeneity of losses and on the structure of the affected economic network. The model reproduces economic collapse, suggesting that it may help understand the difference between limited-consequence disasters and disasters leading to systemic failure.Natural disasters, Economic impacts, Economic Network

A Cost-Benefit Analysis of the New Orleans Flood Protection System

International audienceIn the early stages of rebuilding New Orleans, a decision has to be made on the level of flood protection the city should implement. Such decisions are usually based on cost-benefit analyses. But in such an analysis, the results are contingent on a number of underlying assumptions and varying these assumptions can lead to different recommendations. Indeed, though a standard first-order analysis rules out category 5 hurricane protection, taking into account climate change and other human-related disruptions of environment, second-order impacts of large-scale disasters, possible changes in the discount rate, risk aversion and damage heterogeneity may make such a hurricane protection a rational investment, even if countervailing risks and moral hazard issues are included in the analysis. These results stress the high sensitivity of the CBA recommendation to several uncertain assumptions, highlight the importance of second-order costs and damage heterogeneity in welfare losses, and show how climate change creates an additional layer of uncertainty in infrastructure design that increases the probability of either under-adaptation (and increased risk) or over-adaptation (and sunk costs)

The Resilience of the Indian Economy to Rising Oil Prices as a Validation Test for a Global Energy-Environment-Economy CGE Model

This paper proposes to test the global hybrid computable general equilibrium model IMACLIM-R against macroeconomic data. To do so, it compares the modeled and observed responses of the Indian economy to the rise of oil price during the 2003- 2006 period. The objective is twofold: first, to disentangle the various mechanisms and policies at play in India's economy response to rising oil prices and, second, to validate our model as a tool capable of reproducing short-run statistical data. With default parameterization, the model predicts a significant decrease in the Indian growth rate that is not observed. However, this discrepancy is corrected if three additional mechanisms identified by the International Monetary Fund are introduced, namely the rise in exports of refined oil products, the imbalance of the trade balance allowed by large capital inflows, and the incomplete pass-through of the oil price increase to Indian customers. This work is a first step toward model validation, and provides interesting insights on the modeling methodology relevant to represent an economy's response to a shock, as well as on how short-term mechanisms – and policy action – can smooth the negative impacts of energy price shocks or climate policies. Running headline

Building world narratives for climate change impact, adaptation and vulnerability analyses

The impacts of climate change on human systems depend not only on the level of emissions but also on how inherently vulnerable these systems are to the changing climate. The large uncertainties over future development and structure of societies and economies mean that the assessment of climate change efects is complex. One way to deal with this complexity is by using scenario analysis that takes account of these socio-economic diferences. The challenge is to identify the dimensions along which societies and economies evolve over time in such a way as to cover sufciently diferent vulnerability patterns. This conceptual efort is critical for the development of informative scenarios. Here, we identify three dimensions that take into account the most relevant factors that defne the vulnerability of human systems to climate change and their ability to adapt to it.impacts; vulnerability; adaptation; climate change; scenario; prospective; narratives