Weight Factors in Cost-Benefit Analysis of Climate Change

Equity considerations may justify the use of weight factors when estimating the costs of climate change. This paper reviews different weight factors that have been used in the climate economics literature. Based on a simple model, it is shown that although the different weight factors imply substantially different cost-damage estimates, they actually yield the same optimal emission reductions. This paradox is explained by the fact that some of the approaches require that also the abatement costs are weighted – and this offsets the effect of the diverging cost-damage estimates. The model is then used to analyse the importance weighting may have on the overall cost-benefit analysis. At present, when most of the global emissions of (fossil) CO2 originate from the industrialised countries, the global optimal emissions are considerably lower if costs are weighted. However, the more the emissions in developing countries grow, the less important becomes the introduction of weight factors in cost-benefit analysis of climate change for the global emission reductions, in the model developed here. On a regional level, the introduction of weight factors continues to play an important role, implying substantially lower emissions in the rich region and slightly higher (!) in the poor. Copyright Kluwer Academic Publishers 1999climate change, cost-benefit analysis, developing countries, value of a statistical life, weight factors,