Avoiding path dependence of distributional weights: Lessons from climate change economic assessment

In some cost benefit analysis (CBA) applications, as for example valuation of climate change damages, distributional weights are used to account for diminishing utility of marginal income. This is usually done by intratemporal distributional weights, which are combined with discounting to account for intertemporal equity and efficiency. Here, I show that this approach may introduce some inconsistencies in terms of path dependence. In short, this inconsistency means that regional economic growth is double counted. This is because income weighting is performed both through the discount rate and through the distributional weights, so that growth shows up twice in the weighting process. Using the PAGE2002 model it is found that the inconsistency problem in the original model erases the influence of distributional weights on the social cost of carbon dioxide (SCCO2), compared to a standard CBA approach. The proposed alternative approaches yield about 20-40% higher values of SCCO2 than the old approach.