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Tail-effect and the Role of Greenhouse Gas Emissions Control

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  • In Chang Hwang

    ()
    (Institute for Environmental Studies, Vrije Universiteit, Amsterdam, The Netherlands)

  • Richard S.J. Tol

    ()
    (Department of Economics, University of Sussex, Falmer, United Kingdom
    Institute for Environmental Studies, Vrije Universiteit, Amsterdam, The Netherlands
    Faculty of Economics and Business Administration, Vrije Universiteit, Amsterdam, The Netherlands
    Tinbergen Institute, Amsterdam, The Netherlands)

  • Marjan W. Hofkes

    ()
    (Faculty of Economics and Business Administration, Vrije Universiteit, Amsterdam, The Netherlands
    Institute for Environmental Studies, Vrije Universiteit, Amsterdam, The Netherlands)

Abstract

This paper investigates the role of emissions control on reducing the tail-effect of the fat-tailed distribution of the climate sensitivity. Through a simple analysis on temperature distributions and some numerical simulations using the well-known DICE model, we find that the option for emissions control effectively prevents the tail-effect. Climate policy based on HARA utility is less sensitive to fat tails than climate policy based on CRRA utility.

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Bibliographic Info

Paper provided by Department of Economics, University of Sussex in its series Working Paper Series with number 6613.

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Date of creation: Dec 2013
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Handle: RePEc:sus:susewp:6613

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  1. Kenneth Arrow, 2009. "A note on uncertainty and discounting in models of economic growth," Journal of Risk and Uncertainty, Springer, vol. 38(2), pages 87-94, April.
  2. Antony Millner, 2013. "On Welfare Frameworks and Catastrophic Climate Risks," CESifo Working Paper Series 4442, CESifo Group Munich.
  3. Robert S. Pindyck, 2010. "Fat Tails, Thin Tails, and Climate Change Policy," Working Papers 1012, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
  4. Stephen Newbold & Adam Daigneault, 2009. "Climate Response Uncertainty and the Benefits of Greenhouse Gas Emissions Reductions," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 44(3), pages 351-377, November.
  5. Hwang, In Chang & Reynès, Frédéric & Tol, Richard S. J., 2011. "Climate Policy Under Fat-Tailed Risk: An Application of Dice," Papers WP403, Economic and Social Research Institute (ESRI).
  6. Ingham, Alan & Ma, Jie & Ulph, Alistair, 2007. "Climate change, mitigation and adaptation with uncertainty and learning," Energy Policy, Elsevier, vol. 35(11), pages 5354-5369, November.
  7. Ackerman, Frank & Stanton, Elizabeth A. & Bueno, Ramón, 2010. "Fat tails, exponents, extreme uncertainty: Simulating catastrophe in DICE," Ecological Economics, Elsevier, vol. 69(8), pages 1657-1665, June.
  8. Martin L. Weitzman, 2010. "GHG Targets as Insurance Against Catastrophic Climate Damages," NBER Working Papers 16136, National Bureau of Economic Research, Inc.
  9. Millner, Antony, 2013. "On welfare frameworks and catastrophic climate risks," Journal of Environmental Economics and Management, Elsevier, vol. 65(2), pages 310-325.
  10. Ikefuji, M. & Laeven, R.J.A. & Magnus, J.R. & Muris, C.H.M., 2010. "Expected Utility and Catastrophic Risk in a Stochastic Economy-Climate Model," Discussion Paper 2010-122, Tilburg University, Center for Economic Research.
  11. Martin L. Weitzman, 2011. "Fat-Tailed Uncertainty in the Economics of Catastrophic Climate Change," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 5(2), pages 275-292, Summer.
  12. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, December.
  13. Simon Dietz, 2011. "High impact, low probability? An empirical analysis of risk in the economics of climate change," Climatic Change, Springer, vol. 108(3), pages 519-541, October.
  14. Arrow, Kenneth J, 1974. "The Use of Unbounded Utility Functions in Expected-Utility Maximization: Response," The Quarterly Journal of Economics, MIT Press, vol. 88(1), pages 136-38, February.
  15. In Chang Hwang & Richard S.J. Tol & Marjan W. Hofkes, 2013. "Active Learning about Climate Change," Working Paper Series 6513, Department of Economics, University of Sussex.
  16. Weitzman, Martin L., 2009. "On Modeling and Interpreting the Economics of Catastrophic Climate Change," Scholarly Articles 3693423, Harvard University Department of Economics.
  17. William D. Nordhaus, 2011. "The Economics of Tail Events with an Application to Climate Change," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 5(2), pages 240-257, Summer.
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Cited by:
  1. In Chang Hwang & Richard S.J. Tol & Marjan W. Hofkes, 2013. "Active Learning about Climate Change," Working Paper Series 6513, Department of Economics, University of Sussex.

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