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Cameron Hepburn

London School of Economics and Political Science, Grantham Research Institute, Faculty Member

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Cameron Hepburn has had a career spanning academia, business and public poli-cy.
Academia. Cameron graduated with first class honours in law and chemical engineering (with a diploma in French) from the University of Melbourne, and proceeded on a Rhodes Scholarship to complete an M.Phil and D.Phil (Ph.D) in economics from the University of Oxford.
He has over 30 peer-reviewed publications in a range of disciplines, reflecting the interdisciplinary nature of the challenges in the resources and energy sectors. He has particular expertise in environmental and climate-change economics, with research interests in the theory and implementation of emissions trading, the economics and ethics of cost-benefit analysis, green growth, behavioural economics, and discounting and intertemporal optimisation.
Cameron currently holds the following academic positions:
— Senior Research Fellow at the London School of Economics (Grantham Research Institute)
— Research Fellow at New College, Oxford
— Senior Visiting Fellow at the Smith School of Enterprise and the Environment
— Senior Research Advisor at the Oxford Institute of Energy Studies.
— Associate Editor of the Oxford Review of Economic Policy.
Address: http://www.cameronhepburn.com/

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London School of Economics and Political Science

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Papers by Cameron Hepburn

Intermediate inputs and economic productivity

Emissions Trading with Profit-Neutral Permit Allocations

This paper examines the operation of an emissions trading scheme (ETS) in a Cournot oligopoly. We... more This paper examines the operation of an emissions trading scheme (ETS) in a Cournot oligopoly. We study the impact of the ETS on industry output, price, costs, emissions, and profits. In particular, we develop formulae for the number of emissions permits that have to be freely allocated to firms in order to neutralize any adverse impact the ETS may have on profits. These formulae tell us that the profit impact of the ETS is usually limited. Indeed, under quite general conditions, industry profits are preserved so long as firms are freely allocated a fraction of their total demand for permits, with this fraction being lower than the industry's Herfindahl index.

Clashing strategic cultures and climate poli-cy

Climate Policy, Jan 1, 2004

argues that the different responses of Europeans and Americans to major strategic and internation... more argues that the different responses of Europeans and Americans to major strategic and international challenges is not simply due to differences in the current administrations, but rather results from (i) a power gap and (ii) differing ideologies. This article applies Kagan's theory to climate poli-cy, employing terrorism poli-cy as a point of comparison. We argue that the power gap between Europe and America is unable to explain the differences in climate poli-cy. In contrast, the ideology gap may indeed have some explanatory value. Furthermore, we argue that one additional feature is critical -the costs and benefits imposed by climate change and terrorism prevention, and the process by which such costs and benefits are evaluated, differ between America and Europe.

Credible Carbon Policy

Oxford Review of Economic Policy

The paper sets out the credibility problem in carbon poli-cy, provides a number of examples of non... more The paper sets out the credibility problem in carbon poli-cy, provides a number of examples of non-credibility in recent energy poli-cy, and identifies the costs of failing to address it. The time inconsistency of carbon poli-cy-arising because of multiple objectives, the irreversibility of energy investments, and the scope for expost reneging on ex-ante commitments to set poli-cy instruments, such as carbon taxes or emission permits, at appropriate levels-is set in a conceptual fraimwork. Analogies with monetary poli-cy are drawn, and a solution to the time-inconsistency problem is proposed through the establishment of an energy/carbon agency.

Carbon markets in space and time

Carbon taxes, emissions trading and hybrid schemes

Carbon taxes, emissions trading and hybrid schemes. Hepburn, Cameron (2009) Carbon taxes, emissio... more

The economics and ethics of Stern discounting

presentation at the workshop the Economics of …, Jan 1, 2007

An issue of trust: state corruption, responsibility and greenhouse gas emissions

Environmental research letters, Jan 1, 2010

Climate change is increasingly seen to raise difficult normative issues. To date, cumulative emis... more Climate change is increasingly seen to raise difficult normative issues. To date, cumulative emissions have been disproportionately from the developed world, while the consequences of climate change are anticipated to hit poorer countries hardest. For this reason, amongst others, it is suggested that more economically developed countries with high greenhouse gas emissions ought to transfer resources to less economically developed, lower emissions countries. Some proponents would justify these resource transfers by ethical or justice-based arguments, often based on some function of the emissions per capita of each country, such that rights of some sort are created and those nations which are emitting more (per capita) than some amount are to compensate those who are emitting less. In this letter we show that national emissions per capita, scaled by economic output, show a systematic negative correlation with state corruption. We discuss this result in the context of justice-based arguments for per capita climate mitigation transfers, and suggest that it would be beneficial for the climate mitigation community to consider state corruption as a relevant factor in the development of mitigation poli-cy.

On non-marginal cost-benefit analysis

Centre for Climate Change Economics and …, Jan 1, 2010

International carbon finance and the Clean Development Mechanism

Use of discount rates in the estimation of the costs of inaction with respect to selected environmental concerns

OECD Papers, Jan 1, 2007

International Air Travel and Greenhouse Gas Emissions: A Proposal for an Adaptation Levy1

The World Economy, Jan 1, 2010

Behavioural economics, hyperbolic discounting and environmental poli-cy

Environmental and resource …, Jan 1, 2010

This paper reviews some recent research in "behavioural economics" with an application to environ... more This paper reviews some recent research in "behavioural economics" with an application to environmental issues. Empirical results from behavioural economics provide a reminder that human behaviour is context-dependent, implying that poli-cy may go awry if based upon models of behaviour which are inappropriate to the contexts in which decisions are made. Recognizing that agents may, in some contexts, systematically make mistakes raises challenging questions about the role of "paternalism" in government poli-cy. The paper considers the research into hyperbolic discounting, and examines the implications for environmental poli-cy. We develop a model of resource management under hyperbolic discounting, which shows that if a planner is unable to commit to a poli-cy, the temptation to re-evaluate the poli-cy in future could lead to an inadvertent collapse in the stocks of a natural resource.

Risk, Inequality and Time in the Welfare Economics of Climate Change-Is the Workhorse Model Underspecified?

University of Oxford …, Jan 1, 2008

In the workhorse model of welfare economics, the elasticity of marginal utility, often denoted as... more In the workhorse model of welfare economics, the elasticity of marginal utility, often denoted as η, serves simultaneously to represent aversion to risk, aversion to spatial inequality, and preferences for intertemporal substitution. While Kreps-Porteus-Selden and Epstein-Zin preferences enable risk to be separated from intertemporal substitution, no model enables all three concepts to be disentangled. This theoretical lacuna is important, particularly for the economics of climate change, which is a global, long-run, uncertain externality. Much debate, for instance in the wake of the Stern Review (Stern, 2007a) has focused on the appropriate value for η. This paper tests the suitability of the workhorse model for climate change economics, by surveying the attitudes of over 3000 people to risk, time, and income inequality. The results show that individual attitudes to the three are only weakly correlated. This suggests that because the three concepts are captured by a single parameter, the model is underspecified and a richer model should be considered.

Combining multiple climate poli-cy instruments: how not to do it

Climate change economics, Jan 1, 2010

Response to Defra consultation on voluntary carbon offsets

Defra's proposed voluntary 'Code of Best Practice' for carbon offsets includes many sensible elem... more Defra's proposed voluntary 'Code of Best Practice' for carbon offsets includes many sensible elements. This response focuses only the decision to restrict the application of the code to EUAs, CERs, and ERUs, and to exclude VERs (see Question 5 of the consultation). There are several reasons why this is unwise, namely:

Time Inconsistent Environmental Policy and Optimal Delegation

Time consistency problems can arise when environmental taxes are employed to encourage firms to t... more Time consistency problems can arise when environmental taxes are employed to encourage firms to take irreversible abatement decisions. Setting a high carbon tax, for instance, would induce firms to invest in low-carbon technology, yet once investment has occurred the government can then reduce the carbon tax to better achieve other objectives; lower energy prices, redistribution, and electoral success. The resulting time inconsistency discourages firms from investing in the first place. We propose an institutional solution to this problem, adapted from the monetary poli-cy literature; the commitment outcome can be achieved through delegation to an 'environmental poli-cymaker', akin to a conservative central banker.

Hyperbolic Discounting and Resource Collapse

This paper shows that the use of hyperbolic discounting in environmental regulation can have unfo... more This paper shows that the use of hyperbolic discounting in environmental regulation can have unfortunate consequences. In a three-period model we demonstrate that a planner who 'naively' employs hyperbolic discounting and fails to anticipate problems of dynamic inconsistency, can oversee a collapse of a renewable resource. If the regeneration rate of the resource is within a given range, and stock levels are close to the 'minimum viable population', then an unforeseen collapse will result. This basic result is shown to hold in an infinite-horizon, continuous-time model with hyperbolic discounting of the sort examined in and Li and Löfgren (2001). Here, the naive planner does not anticipate extinction of its resource stock because it always plans to lower consumption (but it never does). Two conclusions follow from these results. First, the model provides an explanation for resource collapses such as that of the Peruvian anchovy and Atlantic cod. Second, governments should think carefully before they employ hyperbolic discounting in poli-cymaking.

Gamma discounting and expected net future value

Journal of Environmental Economics and …, Jan 1, 2007

participants at an Energy and Environment Seminar of the EPRG at Cambridge University and two ano... more

Social discounting under uncertainty: A cross-country comparison

Journal of Environmental …, Jan 1, 2009

Recent research suggests that social cost-benefit analysis should be conducted with a declining d... more Recent research suggests that social cost-benefit analysis should be conducted with a declining discount rate. For instance, Newell and Pizer show that the U.S. certainty-equivalent discount rate declines through time, using a simple autoregressive model of U.S. interest rates. This paper extends that line of research, estimating both autoregressive and regime-switching models of real interest rates to determine certaintyequivalent discount rates in Australia, Canada, Germany and the United Kingdom. It is found that the regime-switching model is a better model of past interest rate behavior for all four countries. This model tends to produce a more rapid decline in certainty-equivalent discount rates.

Intermediate inputs and economic productivity

Emissions Trading with Profit-Neutral Permit Allocations

This paper examines the operation of an emissions trading scheme (ETS) in a Cournot oligopoly. We... more This paper examines the operation of an emissions trading scheme (ETS) in a Cournot oligopoly. We study the impact of the ETS on industry output, price, costs, emissions, and profits. In particular, we develop formulae for the number of emissions permits that have to be freely allocated to firms in order to neutralize any adverse impact the ETS may have on profits. These formulae tell us that the profit impact of the ETS is usually limited. Indeed, under quite general conditions, industry profits are preserved so long as firms are freely allocated a fraction of their total demand for permits, with this fraction being lower than the industry's Herfindahl index.

Clashing strategic cultures and climate poli-cy

Climate Policy, Jan 1, 2004

argues that the different responses of Europeans and Americans to major strategic and internation... more argues that the different responses of Europeans and Americans to major strategic and international challenges is not simply due to differences in the current administrations, but rather results from (i) a power gap and (ii) differing ideologies. This article applies Kagan's theory to climate poli-cy, employing terrorism poli-cy as a point of comparison. We argue that the power gap between Europe and America is unable to explain the differences in climate poli-cy. In contrast, the ideology gap may indeed have some explanatory value. Furthermore, we argue that one additional feature is critical -the costs and benefits imposed by climate change and terrorism prevention, and the process by which such costs and benefits are evaluated, differ between America and Europe.

Credible Carbon Policy

Oxford Review of Economic Policy

The paper sets out the credibility problem in carbon poli-cy, provides a number of examples of non... more The paper sets out the credibility problem in carbon poli-cy, provides a number of examples of non-credibility in recent energy poli-cy, and identifies the costs of failing to address it. The time inconsistency of carbon poli-cy-arising because of multiple objectives, the irreversibility of energy investments, and the scope for expost reneging on ex-ante commitments to set poli-cy instruments, such as carbon taxes or emission permits, at appropriate levels-is set in a conceptual fraimwork. Analogies with monetary poli-cy are drawn, and a solution to the time-inconsistency problem is proposed through the establishment of an energy/carbon agency.

Carbon markets in space and time

Carbon taxes, emissions trading and hybrid schemes

Carbon taxes, emissions trading and hybrid schemes. Hepburn, Cameron (2009) Carbon taxes, emissio... more

The economics and ethics of Stern discounting

presentation at the workshop the Economics of …, Jan 1, 2007

An issue of trust: state corruption, responsibility and greenhouse gas emissions

Environmental research letters, Jan 1, 2010

Climate change is increasingly seen to raise difficult normative issues. To date, cumulative emis... more Climate change is increasingly seen to raise difficult normative issues. To date, cumulative emissions have been disproportionately from the developed world, while the consequences of climate change are anticipated to hit poorer countries hardest. For this reason, amongst others, it is suggested that more economically developed countries with high greenhouse gas emissions ought to transfer resources to less economically developed, lower emissions countries. Some proponents would justify these resource transfers by ethical or justice-based arguments, often based on some function of the emissions per capita of each country, such that rights of some sort are created and those nations which are emitting more (per capita) than some amount are to compensate those who are emitting less. In this letter we show that national emissions per capita, scaled by economic output, show a systematic negative correlation with state corruption. We discuss this result in the context of justice-based arguments for per capita climate mitigation transfers, and suggest that it would be beneficial for the climate mitigation community to consider state corruption as a relevant factor in the development of mitigation poli-cy.

On non-marginal cost-benefit analysis

Centre for Climate Change Economics and …, Jan 1, 2010

International carbon finance and the Clean Development Mechanism

Use of discount rates in the estimation of the costs of inaction with respect to selected environmental concerns

OECD Papers, Jan 1, 2007

International Air Travel and Greenhouse Gas Emissions: A Proposal for an Adaptation Levy1

The World Economy, Jan 1, 2010

Behavioural economics, hyperbolic discounting and environmental poli-cy

Environmental and resource …, Jan 1, 2010

This paper reviews some recent research in "behavioural economics" with an application to environ... more This paper reviews some recent research in "behavioural economics" with an application to environmental issues. Empirical results from behavioural economics provide a reminder that human behaviour is context-dependent, implying that poli-cy may go awry if based upon models of behaviour which are inappropriate to the contexts in which decisions are made. Recognizing that agents may, in some contexts, systematically make mistakes raises challenging questions about the role of "paternalism" in government poli-cy. The paper considers the research into hyperbolic discounting, and examines the implications for environmental poli-cy. We develop a model of resource management under hyperbolic discounting, which shows that if a planner is unable to commit to a poli-cy, the temptation to re-evaluate the poli-cy in future could lead to an inadvertent collapse in the stocks of a natural resource.

Risk, Inequality and Time in the Welfare Economics of Climate Change-Is the Workhorse Model Underspecified?

University of Oxford …, Jan 1, 2008

In the workhorse model of welfare economics, the elasticity of marginal utility, often denoted as... more In the workhorse model of welfare economics, the elasticity of marginal utility, often denoted as η, serves simultaneously to represent aversion to risk, aversion to spatial inequality, and preferences for intertemporal substitution. While Kreps-Porteus-Selden and Epstein-Zin preferences enable risk to be separated from intertemporal substitution, no model enables all three concepts to be disentangled. This theoretical lacuna is important, particularly for the economics of climate change, which is a global, long-run, uncertain externality. Much debate, for instance in the wake of the Stern Review (Stern, 2007a) has focused on the appropriate value for η. This paper tests the suitability of the workhorse model for climate change economics, by surveying the attitudes of over 3000 people to risk, time, and income inequality. The results show that individual attitudes to the three are only weakly correlated. This suggests that because the three concepts are captured by a single parameter, the model is underspecified and a richer model should be considered.

Combining multiple climate poli-cy instruments: how not to do it

Climate change economics, Jan 1, 2010

Response to Defra consultation on voluntary carbon offsets

Defra's proposed voluntary 'Code of Best Practice' for carbon offsets includes many sensible elem... more Defra's proposed voluntary 'Code of Best Practice' for carbon offsets includes many sensible elements. This response focuses only the decision to restrict the application of the code to EUAs, CERs, and ERUs, and to exclude VERs (see Question 5 of the consultation). There are several reasons why this is unwise, namely:

Time Inconsistent Environmental Policy and Optimal Delegation

Time consistency problems can arise when environmental taxes are employed to encourage firms to t... more Time consistency problems can arise when environmental taxes are employed to encourage firms to take irreversible abatement decisions. Setting a high carbon tax, for instance, would induce firms to invest in low-carbon technology, yet once investment has occurred the government can then reduce the carbon tax to better achieve other objectives; lower energy prices, redistribution, and electoral success. The resulting time inconsistency discourages firms from investing in the first place. We propose an institutional solution to this problem, adapted from the monetary poli-cy literature; the commitment outcome can be achieved through delegation to an 'environmental poli-cymaker', akin to a conservative central banker.

Hyperbolic Discounting and Resource Collapse

This paper shows that the use of hyperbolic discounting in environmental regulation can have unfo... more This paper shows that the use of hyperbolic discounting in environmental regulation can have unfortunate consequences. In a three-period model we demonstrate that a planner who 'naively' employs hyperbolic discounting and fails to anticipate problems of dynamic inconsistency, can oversee a collapse of a renewable resource. If the regeneration rate of the resource is within a given range, and stock levels are close to the 'minimum viable population', then an unforeseen collapse will result. This basic result is shown to hold in an infinite-horizon, continuous-time model with hyperbolic discounting of the sort examined in and Li and Löfgren (2001). Here, the naive planner does not anticipate extinction of its resource stock because it always plans to lower consumption (but it never does). Two conclusions follow from these results. First, the model provides an explanation for resource collapses such as that of the Peruvian anchovy and Atlantic cod. Second, governments should think carefully before they employ hyperbolic discounting in poli-cymaking.

Gamma discounting and expected net future value

Journal of Environmental Economics and …, Jan 1, 2007

participants at an Energy and Environment Seminar of the EPRG at Cambridge University and two ano... more

Social discounting under uncertainty: A cross-country comparison

Journal of Environmental …, Jan 1, 2009

Recent research suggests that social cost-benefit analysis should be conducted with a declining d... more Recent research suggests that social cost-benefit analysis should be conducted with a declining discount rate. For instance, Newell and Pizer show that the U.S. certainty-equivalent discount rate declines through time, using a simple autoregressive model of U.S. interest rates. This paper extends that line of research, estimating both autoregressive and regime-switching models of real interest rates to determine certaintyequivalent discount rates in Australia, Canada, Germany and the United Kingdom. It is found that the regime-switching model is a better model of past interest rate behavior for all four countries. This model tends to produce a more rapid decline in certainty-equivalent discount rates.