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What Is The "Damages Function" For Global Warming — And What Difference Might It Make?

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  • MARTIN L. WEITZMAN

    ()
    (Department of Economics, Harvard University, Cambridge, MA 02138, USA)

Abstract

The existing literature on climate change offers little guidance on why one specification or another of a "damages function" has been selected. Ideally, one wants a functional form that captures reality adequately, yet is analytically sufficiently tractable to yield useful results. This paper gives two plausible risk aversion axioms that a reduced form utility function of temperature change and the capacity to produce consumption might reasonably be required to satisfy. These axioms indicate that the standard-practice multiplicative specification of disutility damages from global warming, as well as its additive analogue, are special cases of this paper's theoretically derived utility function. Empirically, the paper gives some numerical examples demonstrating the surprisingly strong implications for economic policy of the distinction between additive and multiplicative disutility damages.

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Bibliographic Info

Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal Climate Change Economics.

Volume (Year): 01 (2010)
Issue (Month): 01 ()
Pages: 57-69

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Handle: RePEc:wsi:ccexxx:v:01:y:2010:i:01:p:57-69

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Related research

Keywords: Damages function; climate change;

References

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  1. Weitzman, Martin L., 2009. "Additive damages, fat-tailed climate dynamics, and uncertain discounting," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 3(39), pages 1-29.
  2. Thomas Sterner & U. Martin Persson, 2008. "An Even Sterner Review: Introducing Relative Prices into the Discounting Debate," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 2(1), pages 61-76, Winter.
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Cited by:
  1. 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.
  2. Dietz, Simon & Asheim, Geir B., 2012. "Climate policy under sustainable discounted utilitarianism," Journal of Environmental Economics and Management, Elsevier, vol. 63(3), pages 321-335.
  3. Crost, Benjamin & Traeger, Christian P., 2013. "Optimal climate policy: Uncertainty versus Monte Carlo," Economics Letters, Elsevier, vol. 120(3), pages 552-558.
  4. Dietz, Simon & Hepburn, Cameron, 2013. "Benefit–cost analysis of non-marginal climate and energy projects," Energy Economics, Elsevier, vol. 40(C), pages 61-71.
  5. Alfred Endres & Tim Friehe, 2012. "Generalized Progress of Abatement Technology: Incentives Under Environmental Liability Law," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 53(1), pages 61-71, September.
  6. Ram Ranjan, 2014. "Optimal carbon mitigation strategy under non-linear feedback effects and in the presence of permafrost release trigger hazard," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 19(4), pages 479-497, April.
  7. Athanassoglou, Stergios & Xepapadeas, Anastasios, 2012. "Pollution control with uncertain stock dynamics: When, and how, to be precautious," Journal of Environmental Economics and Management, Elsevier, vol. 63(3), pages 304-320.

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