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GHG Targets as Insurance Against Catastrophic Climate Damages

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  • Weitzman, Martin L.
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    Abstract

    A critical issue in climate change economics is the specification of the so-called “damages function†and its interaction with the unknown uncertainty of catastrophic outcomes. This paper asks how much we might be misled by our economic assessment of climate change when we employ a conventional quadratic damages function and/or a thin-tailed probability distribution for extreme temperatures. The paper gives some numerical examples of the indirect value of various greenhouse gas (GHG) concentration targets as insurance against catastrophic climate change temperatures and damages. These numerical exercises suggest that we might be underestimating considerably the welfare losses from uncertainty by using a quadratic damages function and/or a thin-tailed temperature distribution. In these examples, the primary reason for keeping GHG levels down is to insure against high-temperature catastrophic climate risks.

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    File URL: http://dash.harvard.edu/bitstream/handle/1/11315435/GHG_Targets_Insurance.pdf
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    Bibliographic Info

    Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 11315435.

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    Date of creation: 2012
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    Publication status: Published in Journal of Public Economic Theory
    Handle: RePEc:hrv:faseco:11315435

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    1. Weitzman, Martin L., 2009. "On Modeling and Interpreting the Economics of Catastrophic Climate Change," Scholarly Articles 3693423, Harvard University Department of Economics.
    2. Partha Dasgupta, 2008. "Discounting climate change," Journal of Risk and Uncertainty, Springer, Springer, vol. 37(2), pages 141-169, December.
    3. Martin L. Weitzman, 2011. "Additive Damages, Fat-Tailed Climate Dynamics, and Uncertain Discounting," NBER Chapters, in: The Economics of Climate Change: Adaptations Past and Present, pages 23-46 National Bureau of Economic Research, Inc.
    4. Weitzman, Martin L., 2009. "Additive Damages, Fat-Tailed Climate Dynamics, and Uncertain Discounting," Scholarly Articles 9639963, Harvard University Department of Economics.
    5. Simon Dietz, 2009. "High impact, low probability? An empirical analysis of risk in the economics of climate change," Grantham Research Institute on Climate Change and the Environment Working Papers, Grantham Research Institute on Climate Change and the Environment 9, Grantham Research Institute on Climate Change and the Environment.
    6. Simon Dietz, 2009. "High impact, low probability? An empirical analysis of risk in the economics of climate change," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 37612, London School of Economics and Political Science, LSE Library.
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    Cited by:
    1. Hwang, In Chang, 2014. "Fat-tailed uncertainty and the learning-effect," MPRA Paper 53671, University Library of Munich, Germany.
    2. Robert Kopp & Bryan Mignone, 2013. "Circumspection, reciprocity, and optimal carbon prices," Climatic Change, Springer, Springer, vol. 120(4), pages 831-843, October.
    3. Tol, Richard S.J., 2013. "Targets for global climate policy: An overview," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 37(5), pages 911-928.
    4. John C. V. Pezzey & Paul J. Burke, 2014. "Towards a More Inclusive and Precautionary Indicator of Global Sustainability," CCEP Working Papers, Centre for Climate Economics & Policy, Crawford School of Public Policy, The Australian National University 1410, Centre for Climate Economics & Policy, Crawford School of Public Policy, The Australian National University.
    5. Dietz, Simon & Hepburn, Cameron, 2013. "Benefit–cost analysis of non-marginal climate and energy projects," Energy Economics, Elsevier, Elsevier, vol. 40(C), pages 61-71.
    6. Hwang, In Chang & Reynes, Frederic & Tol, Richard, 2014. "The effect of learning on climate policy under fat-tailed uncertainty," MPRA Paper 53681, University Library of Munich, Germany.
    7. Richard S.J. Tol, 2012. "Climate Policy with Bentham-Rawls Preferences," Working Paper Series 3812, Department of Economics, University of Sussex.
    8. Simon Dietz & Anca N. Matei, 2013. "Is there space for agreement on climate change? A non-parametric approach to policy evaluation," Grantham Research Institute on Climate Change and the Environment Working Papers, Grantham Research Institute on Climate Change and the Environment 136, Grantham Research Institute on Climate Change and the Environment.
    9. Richard S.J. Tol, 2013. "Bootstraps for Meta-Analysis with an Application to the Impact of Climate Change," Working Paper Series 6413, Department of Economics, University of Sussex.
    10. 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.
    11. Rick Van der Ploeg, 2013. "Untapped Fossil Fuel and the Green Paradox: A classroom calibration of the optimal carbon tax," Economics Series Working Papers OxCarre Research Paper 11, University of Oxford, Department of Economics.
    12. Nicholas Stern, 2013. "The Structure of Economic Modeling of the Potential Impacts of Climate Change: Grafting Gross Underestimation of Risk onto Already Narrow Science Models," Journal of Economic Literature, American Economic Association, vol. 51(3), pages 838-59, September.
    13. In Hwang & Frédéric Reynès & Richard Tol, 2013. "Climate Policy Under Fat-Tailed Risk: An Application of Dice," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 56(3), pages 415-436, November.
    14. John Bistline & John Weyant, 2013. "Electric sector investments under technological and policy-related uncertainties: a stochastic programming approach," Climatic Change, Springer, Springer, vol. 121(2), pages 143-160, November.
    15. Simon Dietz & Nicholas Stern, 2014. "Endogenous growth, convexity of damages and climate risk: how Nordhaus’ framework supports deep cuts in carbon emissions," Grantham Research Institute on Climate Change and the Environment Working Papers, Grantham Research Institute on Climate Change and the Environment 180, Grantham Research Institute on Climate Change and the Environment.
    16. W. Botzen & Jeroen Bergh, 2014. "Specifications of Social Welfare in Economic Studies of Climate Policy: Overview of Criteria and Related Policy Insights," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 58(1), pages 1-33, May.

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