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Fat tails, exponents, extreme uncertainty: Simulating catastrophe in DICE

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  • Ackerman, Frank
  • Stanton, Elizabeth A.
  • Bueno, Ramón

Abstract

The problem of low-probability, catastrophic risk is increasingly central to discussion of climate science and policy. But the integrated assessment models (IAMs) of climate economics rarely incorporate this possibility. What modifications are needed to analyze catastrophic economic risks in an IAM? We explore this question using DICE, a well-known IAM. We examine the implications of a fat-tailed probability distribution for the climate sensitivity parameter, a focus of recent work by Martin Weitzman, and the shape of the damage function, one of the issues raised by the Stern Review. Forecasts of disastrous economic outcomes in DICE can result from the interaction of these two innovations, but not from either one alone.

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Bibliographic Info

Article provided by Elsevier in its journal Ecological Economics.

Volume (Year): 69 (2010)
Issue (Month): 8 (June)
Pages: 1657-1665

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Handle: RePEc:eee:ecolec:v:69:y:2010:i:8:p:1657-1665

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Web page: http://www.elsevier.com/locate/ecolecon

Related research

Keywords: Climate economics Catastrophic risk Climate sensitivity Integrated assessment models DICE model Monte Carlo analysis;

References

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  1. Stephen Newbold & Adam Daigneault, 2009. "Climate Response Uncertainty and the Benefits of Greenhouse Gas Emissions Reductions," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 44(3), pages 351-377, November.
  2. William D. Nordhaus, 2007. "A Review of the Stern Review on the Economics of Climate Change," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 686-702, September.
  3. Ackerman, Frank & Stanton, Elizabeth A. & Hope, Chris & Alberth, Stephane, 2009. "Did the Stern Review underestimate US and global climate damages?," Energy Policy, Elsevier, vol. 37(7), pages 2717-2721, July.
  4. Martin L. Weitzman, 2007. "A Review of the Stern Review on the Economics of Climate Change," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 703-724, September.
  5. Roughgarden, Tim & Schneider, Stephen H., 1999. "Climate change policy: quantifying uncertainties for damages and optimal carbon taxes," Energy Policy, Elsevier, vol. 27(7), pages 415-429, July.
  6. Martin L. Weitzman, 2009. "On Modeling and Interpreting the Economics of Catastrophic Climate Change," The Review of Economics and Statistics, MIT Press, vol. 91(1), pages 1-19, February.
  7. Weitzman, Martin L., 1998. "Why the Far-Distant Future Should Be Discounted at Its Lowest Possible Rate," Journal of Environmental Economics and Management, Elsevier, vol. 36(3), pages 201-208, November.
  8. Simon Dietz & Chris Hope & Nicholas Stern & Dimitri Zenghelis, 2007. "REFLECTIONS ON THE STERN REVIEW (1) A Robust Case for Strong Action to Reduce the Risks of Climate Change," World Economics, World Economics, Economic & Financial Publishing, PO Box 69, Henley-on-Thames, Oxfordshire, United Kingdom, RG9 1GB, vol. 8(1), pages 121-168, January.
  9. Adam Daigneault & Steve Newbold, 2009. "Climate Response Uncertainty and the Unexpected Benefits of Greenhouse Gas Emissions Reductions," NCEE Working Paper Series 200806, National Center for Environmental Economics, U.S. Environmental Protection Agency, revised Mar 2009.
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Citations

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Cited by:
  1. Frank Ackerman, Elizabeth A. Stanton, Ramón Bueno, 2010. "CRED: A New Model of Climate and Development," Working Papers 96, United Nations, Department of Economics and Social Affairs.
  2. Kopp, Robert E. & Golub, Alexander & Keohane, Nathaniel O. & Onda, Chikara, 2012. "The influence of the specification of climate change damages on the social cost of carbon," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 6(13), pages 1-40.
  3. Simon Dietz & Geir B. Asheim, 2011. "Climate policy under sustainable discounted utilitarianism," Grantham Research Institute on Climate Change and the Environment Working Papers 42, Grantham Research Institute on Climate Change and the Environment.
  4. Crost, Benjamin & Traeger, Christian P., 2010. "Risk and aversion in the integrated assessment of climate change," CUDARE Working Paper Series 1104R, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy, revised Jul 2011.
  5. Kopp, Robert E. & Golub, Alexander & Keohane, Nathaniel O. & Onda, Chikara, 2011. "The influence of the specification of climate change damages on the social cost of carbon," Economics Discussion Papers 2011-22, Kiel Institute for the World Economy.
  6. Richard Tol, 2012. "Maximum Carbon Taxes in the Short Run," Working Paper Series 3312, Department of Economics, University of Sussex.
  7. Dietz, Simon, 2011. "The treatment of risk and uncertainty in the US social cost of carbon for regulatory impact analysis," Economics Discussion Papers 2011-30, Kiel Institute for the World Economy.
  8. Simon Dietz, 2011. "High impact, low probability? An empirical analysis of risk in the economics of climate change," Climatic Change, Springer, vol. 108(3), pages 519-541, October.
  9. Nicholas Stern, 2009. "Imperfections in the Economics of Public Policy, Imperfections in Markets, and Climate Change," Working Papers 2009.106, Fondazione Eni Enrico Mattei.
  10. Kopp, Robert E. & Mignone, Bryan K., 2012. "The US government's social cost of carbon estimates after their first two years: Pathways for improvement," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 6(15), pages 1-41.
  11. Elena Rovenskaya, 2011. "One-step Optimization Model of Warming-driven Damage of Economic Growth," DEGIT Conference Papers c016_062, DEGIT, Dynamics, Economic Growth, and International Trade.
  12. Kousky, Carolyn & Kopp, Robert E. & Cooke, Roger, 2011. "Risk premia and the social cost of carbon: A review," Economics Discussion Papers 2011-19, Kiel Institute for the World Economy.
  13. Masako Ikefuji & Roger J. A. Laeven & Jan R. Magnus & Chris Muris, 2011. "Weitzman meets Nordhaus: Expected utility and catastrophic risk in a stochastic economy-climate model," ISER Discussion Paper 0825, Institute of Social and Economic Research, Osaka University.

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