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Additive Damages, Fat-Tailed Climate Dynamics, and Uncertain Discounting

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  • Weitzman, Martin L.
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    Abstract

    This paper in applied theory argues that there is a loose chain of reasoning connecting the following three basic links in the economics of climate change: 1) additive disutility damages may be appropriate for analyzing some impacts of global warming; 2) an uncertain feedback-forcing coefficient, which might be near one with infinitesimal probability, can cause the distribution of the future time trajectory of global temperatures to have fat tails and a high variance; 3) when high-variance additive damages are discounted at an uncertain rate of pure time preference, which might be near zero with infinitesimal probability, it can make expected present discounted disutility very large. Some possible implications for welfare analysis and climate-change policy are briefly noted.

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    File URL: http://dash.harvard.edu/bitstream/handle/1/9639963/AdditiveDamagesFatTailed.pdf
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    Bibliographic Info

    Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 9639963.

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    Date of creation: 2009
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    Publication status: Published in Economics
    Handle: RePEc:hrv:faseco:9639963

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    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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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. 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.
    3. Sterner, Thomas & Persson, U. Martin, 2007. "An Even Sterner Review: Introducing Relative Prices into the Discounting Debate," Discussion Papers, Resources For the Future dp-07-37, Resources For the Future.
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    Cited by:
    1. Michael Funke & Yu-Fu Chen & Nicole Glanemann, 2011. "Dark Clouds or Silver Linings? Knightian Uncertainty and Climate Change," Quantitative Macroeconomics Working Papers, Hamburg University, Department of Economics 21107, Hamburg University, Department of Economics.
    2. 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.
    3. Martin L. Weitzman, 2009. "Risk-Adjusted Gamma Discounting," NBER Working Papers 15588, National Bureau of Economic Research, Inc.
    4. Stern, David I., 2012. "Modeling international trends in energy efficiency," Energy Economics, Elsevier, Elsevier, vol. 34(6), pages 2200-2208.
    5. Martin L. Weitzman, 2010. "What Is The "Damages Function" For Global Warming — And What Difference Might It Make?," Climate Change Economics (CCE), World Scientific Publishing Co. Pte. Ltd., World Scientific Publishing Co. Pte. Ltd., vol. 1(01), pages 57-69.
    6. David Hendry, 2010. "Climate Change: Lessons for our Future from the Distant Past," Economics Series Working Papers 485, University of Oxford, Department of Economics.
    7. Robert S. Pindyck, 2010. "Modeling the Impact of Warming in Climate Change Economics," NBER Working Papers 15692, National Bureau of Economic Research, Inc.
    8. Michael Funke & Yu-Fu Chen & Nicole Glanemann, 2011. "Time is Running Out: The 2°C Target and Optimal Climate Policies," Quantitative Macroeconomics Working Papers, Hamburg University, Department of Economics 21111, Hamburg University, Department of Economics.
    9. 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.
    10. Pindyck, Robert S., 2012. "Uncertain outcomes and climate change policy," Journal of Environmental Economics and Management, Elsevier, vol. 63(3), pages 289-303.
    11. Weitzman, Martin L., 2012. "GHG Targets as Insurance Against Catastrophic Climate Damages," Scholarly Articles 11315435, Harvard University Department of Economics.
    12. Boyarchenko, Svetlana & Levendorskii, Sergei, 2010. "Discounting when income is stochastic and climate change policies," MPRA Paper 27998, University Library of Munich, Germany.
    13. 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, European Association of Environmental and Resource Economists, vol. 53(1), pages 61-71, September.

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