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Global Warming And Fat Tailed-Uncertainty: Rethinking The Timing And Intensity Of Climate Policy

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  • Yu-Fu Chen
  • Michael Funke

Abstract

The possibility of low-probability extreme natural events has reignited the debate over the optimal intensity and timing of climate policy. In this paper, we contribute to the literature by assessing the implications of low-probability extreme events on environmental policy in a continuous-time real options model with “tail risk”. In a nutshell, our results indicate the importance of tail risk and call for foresighted pre-emptive climate policies.

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File URL: http://www.dundee.ac.uk/media/dundeewebsite/economicstudies/documents/discussion/DDPE_267.pdf
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Bibliographic Info

Paper provided by Economic Studies, University of Dundee in its series Dundee Discussion Papers in Economics with number 267.

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Length: 23 pages
Date of creation: Jun 2012
Date of revision:
Handle: RePEc:dun:dpaper:267

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Keywords: Climate Policy; Extreme Events; Real Options; Levy process;

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  1. Pizer, William A., 1999. "The optimal choice of climate change policy in the presence of uncertainty," Resource and Energy Economics, Elsevier, vol. 21(3-4), pages 255-287, August.
  2. Simon Dietz & Nicholas Stern, 2008. "Why Economic Analysis Supports Strong Action on Climate Change: A Response to the Stern Review's Critics," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 2(1), pages 94-113, Winter.
  3. Azar, Christian & Sterner, Thomas, 1996. "Discounting and distributional considerations in the context of global warming," Ecological Economics, Elsevier, vol. 19(2), pages 169-184, November.
  4. Pindyck, Robert S., 1998. "Irreversibilities and the timing of environmental policy," Working papers WP 4047-98., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  5. Baranzini, Andrea & Chesney, Marc & Morisset, Jacques, 2003. "The impact of possible climate catastrophes on global warming policy," Energy Policy, Elsevier, vol. 31(8), pages 691-701, June.
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