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Climate Policy Under Fat-Tailed Risk: An Application of Dice

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  • In Hwang

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  • Frédéric Reynès
  • Richard Tol

Abstract

Uncertainty plays a significant role in evaluating climate policy, and fat-tailed uncertainty may dominate policy advice. Should we make our utmost effort to prevent the arbitrarily large impacts of climate change under deep uncertainty? In order to answer to this question, we propose a new way of investigating the impact of (fat-tailed) uncertainty on optimal climate policy: the curvature of the optimal carbon tax against the uncertainty. We find that the optimal carbon tax increases as the uncertainty about climate sensitivity increases, but it does not accelerate as implied by Weitzman’s Dismal Theorem. We find the same result in a wide variety of sensitivity analyses. These results emphasize the importance of balancing the costs of climate change against its benefits, also under deep uncertainty. Copyright Springer Science+Business Media Dordrecht 2013

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File URL: http://hdl.handle.net/10.1007/s10640-013-9654-y
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Bibliographic Info

Article provided by European Association of Environmental and Resource Economists in its journal Environmental and Resource Economics.

Volume (Year): 56 (2013)
Issue (Month): 3 (November)
Pages: 415-436

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Handle: RePEc:kap:enreec:v:56:y:2013:i:3:p:415-436

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Web page: http://www.springerlink.com/link.asp?id=100263

Related research

Keywords: Climate change; Decision making under uncertainty; Fat-tailed risk; Integrated assessment; Q54;

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References

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Citations

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Cited by:
  1. In Chang Hwang & Richard S.J. Tol & Marjan W. Hofkes, 2013. "Tail-effect and the Role of Greenhouse Gas Emissions Control," Working Paper Series 6613, Department of Economics, University of Sussex.
  2. Edilio Valentini & Paolo Vitale, 2014. "Optimal Climate Policy for a Pessimistic Social Planner," Working Papers 2014.33, Fondazione Eni Enrico Mattei.
  3. Hwang, In Chang, 2014. "Fat-tailed uncertainty and the learning-effect," MPRA Paper 53671, University Library of Munich, Germany.

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