The Behavioural Economics of Climate Change

Posted: 7 Nov 2008

See all articles by Kjell Arne Brekke

Kjell Arne Brekke

University of Oslo - Frisch Center; University of Oslo - Department of Economics

Olof Johansson-Stenman

Goeteborg University - School of Economics & Commercial Law

Date Written: Summer 2008

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 emphasized.

Keywords: behavioural economics, prospect theory, equity premium puzzle, social preferences, climate negotiations, D63, Q54

Suggested Citation

Brekke, Kjell Arne and Brekke, Kjell Arne and Johansson-Stenman, Olof, The Behavioural Economics of Climate Change (Summer 2008). Oxford Review of Economic Policy, Vol. 24, No. 2, pp. 280-297, 2008, Available at SSRN: https://ssrn.com/abstract=1297152 or http://dx.doi.org/grn012

Kjell Arne Brekke (Contact Author)

University of Oslo - Frisch Center ( email )

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+47 22 95 88 19 (Phone)
+47 22 95 88 25 (Fax)

HOME PAGE: www.frisch.uio.no

University of Oslo - Department of Economics ( email )

P.O. Box 1095 Blindern
N-0317 Oslo
Norway
+47 22 84 11 69 (Phone)

Olof Johansson-Stenman

Goeteborg University - School of Economics & Commercial Law ( email )

Box 640
SE 405 30 Goeteborg
Sweden
+46-31-773 25 38 (Phone)
+46-31-773 13 26 (Fax)

HOME PAGE: http://www.handels.gu.se/econ/EEU/johansso.htm

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