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On Hyperbolic Discounting in Energy Models: An Application to Natural Gas Allocation in Canada

Recent work on time discounting involves hyperbolic discounting, in which the marginal discount rate shrinks over time. This work examines hyperbolic discounting and energy resource allocation utilizing a complex dynamic optimization model of natural gas allocation for British Columbia, Canada. Four hyperbolic and three conventional (constant annual) discount rate paths are considered. Focus is placed on the consequences: of using one hyperbolic discount rate path when another hyperbolic path is appropriate, of using conventional discounting when hyperbolic discounting is appropriate, and of using hyperbolic discounting when conventional discounting is appropriate. The generality and implications of the findings are also considered.

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Energy Specializations: Energy Modeling – Energy Data, Modeling, and Policy Analysis; Natural Gas – Markets and Prices; Natural Gas – Policy and Regulation

JEL Codes: Q41: Energy: Demand and Supply; Prices, Q40: Energy: General, Q35: Hydrocarbon Resources, Q31: Nonrenewable Resources and Conservation: Demand and Supply; Prices, Q21: Renewable Resources and Conservation: Demand and Supply; Prices

Keywords: Hyperbolic discounting, Energy models, Natural gas allocation, Canada

DOI: 10.5547/ISSN0195-6574-EJ-Vol29-NoSI-8

Published in Volume 29, Special Issue of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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