The Behavioural Economics of Climate Change

Kjell Arne Brekke and Olof Johansson-Stenman ()

No 305, Working Papers in Economics from University of Gothenburg, Department of Economics

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. (search for similar items in EconPapers)
JEL-codes: D63 Q54 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2008-05-19
New Economics Papers: this item is included in nep-cbe, nep-ene, nep-env, nep-evo, nep-res and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (64)

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Journal Article: The behavioural economics of climate change (2008)
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