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Fat Tails and the Social Cost of Carbon

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  • Martin L. Weitzman

Abstract

At high enough greenhouse gas concentrations, climate change might conceivably cause catastrophic damages with small but non-negligible probabilities. If the bad tail of climate damages is sufficiently fat, and if the coefficient of relative risk aversion is greater than one, the catastrophe-reducing insurance aspect of mitigation investments could in theory have a strong influence on raising the social cost of carbon. In this paper I exposit the influence of fat tails on climate change economics in a simple stark formulation focused on the social cost of carbon. I then attempt to place the basic underlying issues within a balanced perspective.

Suggested Citation

  • Martin L. Weitzman, 2014. "Fat Tails and the Social Cost of Carbon," American Economic Review, American Economic Association, vol. 104(5), pages 544-546, May.
  • Handle: RePEc:aea:aecrev:v:104:y:2014:i:5:p:544-46 Note: DOI: 10.1257/aer.104.5.544
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    References listed on IDEAS

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    1. Robert S. Pindyck, 2013. "Climate Change Policy: What Do the Models Tell Us?," Journal of Economic Literature, American Economic Association, pages 860-872.
    2. 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.
    3. Robert J. Barro, 2015. "Environmental Protection, Rare Disasters and Discount Rates," Economica, London School of Economics and Political Science, vol. 82(325), pages 1-23, January.
    4. Antony Millner, 2013. "On Welfare Frameworks and Catastrophic Climate Risks," CESifo Working Paper Series 4442, CESifo Group Munich.
    5. Millner, Antony, 2013. "On welfare frameworks and catastrophic climate risks," Journal of Environmental Economics and Management, Elsevier, vol. 65(2), pages 310-325.
    6. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. repec:eee:eneeco:v:66:y:2017:i:c:p:182-193 is not listed on IDEAS
    2. Sam Fankhauser & Frank Jotzo, 2017. "Economic growth and development with low-carbon energy," CCEP Working Papers 1705, Centre for Climate Economics & Policy, Crawford School of Public Policy, The Australian National University.
    3. Heindl, Peter & Kanschik, Philipp, 2016. "Ecological sufficiency, individual liberties, and distributive justice: Implications for policy making," Ecological Economics, Elsevier, vol. 126(C), pages 42-50.
    4. Li, Xin & Narajabad, Borghan N. & Temzelides, Theodosios, 2014. "Robust Dynamic Optimal Taxation and Environmental Externalities," Finance and Economics Discussion Series 2014-75, Board of Governors of the Federal Reserve System (U.S.).
    5. Hjort, Ingrid, 2016. "Potential Climate Risks in Financial Markets: A Literature Overview," Memorandum 01/2016, Oslo University, Department of Economics.
    6. Steven Poelhekke, 2017. "How expensive should CO2 be? Fuel for the debate on optimal climate policy," DNB Working Papers 579, Netherlands Central Bank, Research Department.
    7. repec:eee:ecolec:v:141:y:2017:i:c:p:245-260 is not listed on IDEAS
    8. Wagner, Gernot & Zeckhauser, Richard J., 2016. "Confronting Deep and Persistent Climate Uncertainty," Working Paper Series 16-025, Harvard University, John F. Kennedy School of Government.
    9. Stephane Hallegatte & Mook Bangalore & Laura Bonzanigo & Marianne Fay & Tamaro Kane & Ulf Narloch & Julie Rozenberg & David Treguer & Adrien Vogt-Schilb, 2016. "Shock Waves," World Bank Publications, The World Bank, number 22787.
    10. Marc N. Conte & David L. Kelly, 2016. "An Imperfect Storm: Fat-Tailed Hurricane Damages, Insurance and Climate Policy," Working Papers 2016-01, University of Miami, Department of Economics.

    More about this item

    JEL classification:

    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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