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Towards Impact Functions for Stochastic Climate Change

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  • Richard S.J. Tol

    (Department of Economics, University of Sussex
    Institute for Environmental Studies, Vrije Universiteit, Amsterdam, The Netherlands
    Department of Spatial Economics, Vrije Universiteit, Amsterdam, The Netherlands
    Tinbergen Institute, Amsterdam, The Netherlands)

  • Francisco Estrada

    (Institute for Environmental Studies, Vrije Universiteit, Amsterdam, The Netherlands
    Centro de Ciencias de la Atmósfera, Universidad Nacional Autónoma de México, Mexico)

Abstract

Most functions of economic impact assume that climate change is smooth. We here propose impact functions that have stochastic climate change as an input. These functions are identical in shape and have similar parameters as do deterministic impact functions. The mean stochastic impacts are thus similar to deterministic impacts. Welfare effects are larger, and the stochasticity premium is larger than the risk premium. Stochasticity is more important for past impacts than for future impacts.

Suggested Citation

  • Richard S.J. Tol & Francisco Estrada, 2013. "Towards Impact Functions for Stochastic Climate Change," Working Paper Series 6113, Department of Economics, University of Sussex Business School.
    • Handle: RePEc:sus:susewp:6113
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    File URL: http://www.sussex.ac.uk/economics/documents/wps-61-2013.pdf
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    References listed on IDEAS

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    1. Stephen H. Schneider, 2001. "What is 'dangerous' climate change?," Nature, Nature, vol. 411(6833), pages 17-19, May.
    2. Richard Tol, 2013. "The economic impact of climate change in the 20th and 21st centuries," Climatic Change, Springer, vol. 117(4), pages 795-808, April.
    3. Matthew H. England & Shayne McGregor & Paul Spence & Gerald A. Meehl & Axel Timmermann & Wenju Cai & Alex Sen Gupta & Michael J. McPhaden & Ariaan Purich & Agus Santoso, 2014. "Recent intensification of wind-driven circulation in the Pacific and the ongoing warming hiatus," Nature Climate Change, Nature, vol. 4(3), pages 222-227, March.
    4. Yongyang Cai & Kenneth L. Judd & Thomas S. Lontzek, 2012. "Open science is necessary," Nature Climate Change, Nature, vol. 2(5), pages 299-299, May.
    5. Myles R. Allen, 2003. "Climate forecasting: Possible or probable?," Nature, Nature, vol. 425(6955), pages 242-242, September.
    6. Jamie Sanderson & Sardar M. N. Islam, 2007. "Climate Change and Economic Development," Palgrave Macmillan Books, Palgrave Macmillan, number 978-0-230-59012-0.
    7. Richard Tol, 2012. "On the Uncertainty About the Total Economic Impact of Climate Change," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 53(1), pages 97-116, September.
    8. Richard S.J. Tol & Francisco Estrada, 2013. "Estimating the Global Impacts of Climate Variability and Change During the 20th Century," Working Paper Series 6213, Department of Economics, University of Sussex Business School.
    9. Dalton, Michael G., 1997. "The Welfare Bias from Omitting Climatic Variability in Economic Studies of Global Warming," Journal of Environmental Economics and Management, Elsevier, vol. 33(3), pages 221-239, July.
    10. Joeri Rogelj & Malte Meinshausen & Reto Knutti, 2012. "Global warming under old and new scenarios using IPCC climate sensitivity range estimates," Nature Climate Change, Nature, vol. 2(4), pages 248-253, April.
    11. 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.
    12. Thomas S. Lontzek & Yongyang Cai & Kenneth L. Judd & Timothy M. Lenton, 2015. "Stochastic integrated assessment of climate tipping points indicates the need for strict climate policy," Nature Climate Change, Nature, vol. 5(5), pages 441-444, May.
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    Cited by:

    1. David Anthoff & Francisco Estrada & Richard S. J. Tol, 2016. "Shutting Down the Thermohaline Circulation," American Economic Review, American Economic Association, vol. 106(5), pages 602-606, May.
    2. Richard S.J. Tol, 2020. "The Economic Impact of Weather and Climate," Video Library 2094, Department of Economics, University of Sussex Business School.
    3. Francisco Estrada & Richard S. J. Tol & Wouter Botzen, 2023. "Economic consequences of the spatial and temporal variability of climate change," Papers 2304.08049, arXiv.org.
    4. David Anthoff & Francisco Estrada & Richard S. J. Tol, 2016. "Shutting Down the Thermohaline Circulation," American Economic Review, American Economic Association, vol. 106(5), pages 602-06, May.
    5. Francisco Estrada & Richard S J Tol & Wouter J W Botzen, 2017. "Global economic impacts of climate variability and change during the 20th century," PLOS ONE, Public Library of Science, vol. 12(2), pages 1-16, February.

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    More about this item

    Keywords

    economic impact of climate change; stochasticity; risk premium;
    All these keywords.

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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