Inequality aversion and the environment
A version of this paper was published in the Journal of Environmental Economics and Management in September 2021.
In this paper the authors provide experimental evidence to illustrate that aversion to environmental inequality is as pronounced as aversion to income inequality and varies across different types of environmental quality. Their estimates have implications for the cost benefit analysis (CBA) of environmental projects and the integrated assessment modelling of climate change policy: aversion to environmental inequality is a determinant of the social discount rate (SDR) for the environment and, correspondingly, the change over time in the social value of environmental quality relative to other goods and services in society.
The authors test aversion to environmental inequalities in a variety of environmental domains (air pollution, reforestation, agriculture) and frames (intra-/inter-temporal, gain/loss, past/present). Their experiments act as a test of the extended Ramsey Rule for social discounting. The paper helps provide a firmer basis for the welfare analysis of long-term public policy concerning natural resources and environmental quality.
Key points for decision-makers
- SDRs are used to put a present value on costs and benefits that will occur at a later date.
- Using dual SDRs for environment and consumption is an equivalent way to account for the changing social value (relative prices) for environmental quality.
- Aversion to inequality in environmental quality is a determinant of the environmental SDR.
- The authors used hypothetical decision-making tasks in which their respondents choose either a green project that creates a large increase in environmental quality in an already-green region or a smaller increase in environmental quality in a dirtier region.
- From the results of their experiment, the authors estimate aversion to environmental inequality and find that if environmental quality is halved (divided by 2), the social value of environmental quality increases by a multiple of 2η, where η measures inequality aversion. The social value of environmental quality increases by:
- 23 = 8 for intra-temporal (instantaneous) trade-offs in environmental quality, since here η = 3
- 21.4 = 2.7 for inter-temporal (across time) trade-offs when environmental quality is growing (a ‘Green Future’ scenario), since here η = 1.4
- 22 = 4 for inter-temporal trade-offs when environmental quality is growing (a ‘Brown Future’ scenario – i.e. a degraded environment), since here η = 2.
- For an inequality aversion measure of 2, and a future with 50 per cent less environmental quality, the shadow price of environmental quality should be four times its current shadow price, other things being equal (e.g. consumption).
- Equivalently, the SDR for environmental quality should be lower than for consumption.
- Aversion to inequality in environmental quality is significant, but the extended Ramsey Rule is only a rough approximation to how people think about social welfare and the social discount rate.
- The results could be a useful input to policymaking on social discounting in the UK and the Netherlands, whose governments are considering dual discounting frameworks.