Fat tails, exponents, extreme uncertainty: Simulating catastrophe in DICE
The problem of low-probability, catastrophic risk is increasingly central to discussion of climate science and policy. But the integrated assessment models (IAMs) of climate economics rarely incorporate this possibility. What modifications are needed to analyze catastrophic economic risks in an IAM? We explore this question using DICE, a well-known IAM. We examine the implications of a fat-tailed probability distribution for the climate sensitivity parameter, a focus of recent work by Martin Weitzman, and the shape of the damage function, one of the issues raised by the Stern Review. Forecasts of disastrous economic outcomes in DICE can result from the interaction of these two innovations, but not from either one alone.
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- Ackerman, Frank & Stanton, Elizabeth A. & Hope, Chris & Alberth, Stephane, 2009. "Did the Stern Review underestimate US and global climate damages?," Energy Policy, Elsevier, vol. 37(7), pages 2717-2721, July.
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- Weitzman, Martin L., 1998. "Why the Far-Distant Future Should Be Discounted at Its Lowest Possible Rate," Journal of Environmental Economics and Management, Elsevier, vol. 36(3), pages 201-208, November.
- 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.
- William D. Nordhaus, 2007. "A Review of the Stern Review on the Economics of Climate Change," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 686-702, September.
- Martin L. Weitzman, 2007. "A Review of the Stern Review on the Economics of Climate Change," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 703-724, September. Full references (including those not matched with items on IDEAS)
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