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Is the Uncertainty about Climate Change Too Large for Expected Cost-Benefit Analysis?

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Author Info

  • Richard S.J. Tol

    ()
    (Economic and Social Research Institute, Dublin)

Abstract

Cost-benefit analysis is only applicable if the variances of both costs and benefits are finite. In the case of climate change, the variances of the net present marginal costs and benefits of greenhouse gas emission reduction need to be finite. Finiteness is hard, if not impossible to prove. The opposite is easier to establish as one needs to shows that there is one, not impossible representation of the climate change with infinite variance. The paper shows that all relevant current variables of the FUND model have finite variances. However, there is a small chance that climate change reverses economic growth in some regions. In that case, the discount rate becomes negative and the net present marginal benefits of greenhouse gas emission reduction becomes very large. So large, that its variance is unbounded.

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File URL: http://www.fnu.zmaw.de/fileadmin/fnu-files/publication/working-papers/maxuncertain1.pdf
File Function: First version, 2000
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Bibliographic Info

Paper provided by Research unit Sustainability and Global Change, Hamburg University in its series Working Papers with number FNU-3.

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Length: 21 pages
Date of creation: Sep 2000
Date of revision: Sep 2000
Publication status: Published, Climatic Change, 56 (3), 265-289
Handle: RePEc:sgc:wpaper:3

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Related research

Keywords: Climate change; cost-benefit analysis; uncertainty;

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References

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  1. Samuel Fankhauser & Richard Tol & DAVID Pearce, 1997. "The Aggregation of Climate Change Damages: a Welfare Theoretic Approach," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 10(3), pages 249-266, October.
  2. Kolstad, Charles D., 1996. "Learning and Stock Effects in Environmental Regulation: The Case of Greenhouse Gas Emissions," Journal of Environmental Economics and Management, Elsevier, vol. 31(1), pages 1-18, July.
  3. Manne, Alan & Mendelsohn, Robert & Richels, Richard, 1995. "MERGE : A model for evaluating regional and global effects of GHG reduction policies," Energy Policy, Elsevier, vol. 23(1), pages 17-34, January.
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Cited by:
  1. Weitzman, Martin L., 2007. "Structural Uncertainty and the Value of Statistical Life in the Economics of Catastrophic Climate Change," Working paper 545, Regulation2point0.
  2. Weitzman, Martin L., 2009. "On Modeling and Interpreting the Economics of Catastrophic Climate Change," Scholarly Articles 3693423, Harvard University Department of Economics.
  3. Anda, Jon & Golub, Alexander & Strukova, Elena, 2009. "Economics of climate change under uncertainty: Benefits of flexibility," Energy Policy, Elsevier, vol. 37(4), pages 1345-1355, April.
  4. Scott, Susan & Watson, Dorothy, 2009. "Cost-benefit Analysis of the Introduction of Weight-based Charges for Domestic Waste ? West Cork's Experience," Papers WP335, Economic and Social Research Institute (ESRI).
  5. 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.

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