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Uncertain Outcomes and Climate Change Policy

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  • Robert S. Pindyck

Abstract

Focusing on tail effects, I incorporate distributions for temperature change and its economic impact in an analysis of climate change policy. I estimate the fraction of consumption w*(tau) that society would be willing to sacrifice to ensure that any increase in temperature at a future point is limited to tau. Using information on the distributions for temperature change and economic impact from studies assembled by the IPCC and from “integrated assessment models” (IAMs), I fit displaced gamma distributions for these variables. Unlike existing IAMs, I model economic impact as a relationship between temperature change and the growth rate of GDP as opposed to its level, so that warming has a permanent impact on future GDP. The fitted distributions for temperature change and economic impact generally yield values of w*(tau) below 2%, even for small values of tau, unless one assumes extreme parameter values and/or substantial shifts in the temperature distribution. These results are consistent with moderate abatement policies.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15259.

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Date of creation: Aug 2009
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Handle: RePEc:nbr:nberwo:15259

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  1. Kolstad, Charles D., 1996. "Fundamental irreversibilities in stock externalities," Journal of Public Economics, Elsevier, vol. 60(2), pages 221-233, May.
  2. Stavins, Robert, 2004. "Environmental Economics," Discussion Papers dp-04-54, Resources For the Future.
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  4. Gollier, Christian & Jullien, Bruno & Treich, Nicolas, 2000. "Scientific progress and irreversibility: an economic interpretation of the 'Precautionary Principle'," Journal of Public Economics, Elsevier, vol. 75(2), pages 229-253, February.
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  10. Brock,W.A. & Taylor,M.S., 2004. "The Green Solow model," Working papers 16, Wisconsin Madison - Social Systems.
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  13. Pindyck, Robert S., 2002. "Optimal timing problems in environmental economics," Journal of Economic Dynamics and Control, Elsevier, vol. 26(9-10), pages 1677-1697, August.
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  15. Anthony Fisher & Urvashi Narain, 2003. "Global Warming, Endogenous Risk, and Irreversibility," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 25(4), pages 395-416, August.
  16. Tol, Richard S. J., 2008. "The Economic Impact of Climate Change," Papers WP255, Economic and Social Research Institute (ESRI).
  17. Adam Daigneault & Steve Newbold, 2009. "Climate Response Uncertainty and the Unexpected Benefits of Greenhouse Gas Emissions Reductions," NCEE Working Paper Series 200806, National Center for Environmental Economics, U.S. Environmental Protection Agency, revised Mar 2009.
  18. Richard S. J. Tol, 2009. "The Economic Effects of Climate Change," Journal of Economic Perspectives, American Economic Association, vol. 23(2), pages 29-51, Spring.
  19. Cropper, Maureen & Laibson, David, 1998. "The implications of hyperbolic discounting for project evaluation," Policy Research Working Paper Series 1943, The World Bank.
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  1. > Environmental and Natural Resource Economics > Climate economics > Irreversibility and learning
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