IDEAS home Printed from https://ideas.repec.org/a/eee/eneeco/v42y2014icp201-203.html
   My bibliography  Save this article

Cost–benefit analysis under uncertainty — A note on Weitzman's dismal theorem

Author

Listed:
  • Horowitz, John
  • Lange, Andreas

Abstract

Weitzman's (2009) famous dismal theorem argues that “fat tails” in the distribution of warming may pose problems for cost–benefit analysis as it may imply that society might be willing to exchange today's consumption for future consumption at an infinite rate. His analysis is based on the stochastic discount factor. We show that in situations in which the stochastic discount factor is applicable, it is optimal for society to devote only a finite amount of resources to protect against climate change. For general assumptions on the investment returns, cost–benefit analysis must consider the joint distribution of the marginal utility of future consumption and marginal returns to investment in the different future states of nature. We explore the range of situations under which challenges for applying cost–benefit analysis under uncertainty remain.

Suggested Citation

  • Horowitz, John & Lange, Andreas, 2014. "Cost–benefit analysis under uncertainty — A note on Weitzman's dismal theorem," Energy Economics, Elsevier, vol. 42(C), pages 201-203.
    • Handle: RePEc:eee:eneeco:v:42:y:2014:i:c:p:201-203
    DOI: 10.1016/j.eneco.2013.12.013
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S014098831300296X
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.eneco.2013.12.013?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Martin L. Weitzman, 2009. "On Modeling and Interpreting the Economics of Catastrophic Climate Change," The Review of Economics and Statistics, MIT Press, vol. 91(1), pages 1-19, February.
    2. Karp, Larry S., 2009. "Sacrifice, discounting and climate policy : five questions," CUDARE Working Paper Series 1086, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
    3. William D. Nordhaus, 2009. "An Analysis of the Dismal Theorem," Levine's Working Paper Archive 814577000000000116, David K. Levine.
    4. Karp, Larry S., 2009. "Sacrifice, discounting and climate policy: five questions," CUDARE Working Papers 51612, University of California, Berkeley, Department of Agricultural and Resource Economics.
    5. -, 2009. "The economics of climate change," Sede Subregional de la CEPAL para el Caribe (Estudios e Investigaciones) 38679, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    6. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    RePEc Biblio mentions

    As found on the RePEc Biblio, the curated bibliography for Economics:
    1. > Environmental and Natural Resource Economics > Climate economics > Uncertainty

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Richard S.J. Tol, 2018. "The impact of climate change and the social cost of carbon," Working Paper Series 1318, Department of Economics, University of Sussex Business School.
    2. David Anthoff & Richard S. J. Tol, 2022. "Testing the Dismal Theorem," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 9(5), pages 885-920.
    3. Lee, Amy H.I. & Chen, Hsing Hung & Chen, Jack, 2017. "Building smart grid to power the next century in Taiwan," Renewable and Sustainable Energy Reviews, Elsevier, vol. 68(P1), pages 126-135.
    4. Buchholz Wolfgang & Heindl Peter, 2015. "Ökonomische Herausforderungen des Klimawandels," Perspektiven der Wirtschaftspolitik, De Gruyter, vol. 16(4), pages 324-350, December.
    5. Billette de Villemeur, Etienne & Leroux, Justin, 2016. "Plaidoyer pour une autre approche des politiques climatiques : De la poursuite de l’intérêt propre à l’introduction du principe de responsabilité [For another approach to climate policy: From the p," MPRA Paper 74998, University Library of Munich, Germany.
    6. Andrea Rampa, 2020. "Climate change, catastrophes and Dismal Theorem: a critical review [Klimawandel, Katastrophen und das „Dismal Theorem“: eine kritische Überprüfung]," Review of Regional Research: Jahrbuch für Regionalwissenschaft, Springer;Gesellschaft für Regionalforschung (GfR), vol. 40(2), pages 113-136, October.
    7. Richard S J Tol, 2018. "The Economic Impacts of Climate Change," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 12(1), pages 4-25.
    8. In Chang Hwang & Richard S. J. Tol & Marjan W. Hofkes, 2019. "Active Learning and Optimal Climate Policy," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 73(4), pages 1237-1264, August.
    9. In Chang Hwang, 2016. "Active learning and optimal climate policy," EcoMod2016 9611, EcoMod.
    10. Hwang, In Chang, 2014. "Fat-tailed uncertainty and the learning-effect," MPRA Paper 53671, University Library of Munich, Germany.
    11. Christoph M. Rheinberger & Nicolas Treich, 2017. "Attitudes Toward Catastrophe," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 67(3), pages 609-636, July.
    12. Hwang, In Chang & Tol, Richard S.J. & Hofkes, Marjan W., 2016. "Fat-tailed risk about climate change and climate policy," Energy Policy, Elsevier, vol. 89(C), pages 25-35.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ikefuji, Masako & Laeven, Roger J.A. & Magnus, Jan R. & Muris, Chris, 2015. "Expected utility and catastrophic consumption risk," Insurance: Mathematics and Economics, Elsevier, vol. 64(C), pages 306-312.
    2. Millner, Antony, 2013. "On welfare frameworks and catastrophic climate risks," Journal of Environmental Economics and Management, Elsevier, vol. 65(2), pages 310-325.
    3. Hwang, In Chang & Tol, Richard S.J. & Hofkes, Marjan W., 2016. "Fat-tailed risk about climate change and climate policy," Energy Policy, Elsevier, vol. 89(C), pages 25-35.
    4. W. Botzen & Jeroen Bergh, 2014. "Specifications of Social Welfare in Economic Studies of Climate Policy: Overview of Criteria and Related Policy Insights," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 58(1), pages 1-33, May.
    5. Stergios Athanassoglou & Anastasios Xepapadeas, 2011. "Pollution Control: When, and How, to be Precautious," Working Papers 2011.18, Fondazione Eni Enrico Mattei.
    6. Andrea Rampa, 2020. "Climate change, catastrophes and Dismal Theorem: a critical review [Klimawandel, Katastrophen und das „Dismal Theorem“: eine kritische Überprüfung]," Review of Regional Research: Jahrbuch für Regionalwissenschaft, Springer;Gesellschaft für Regionalforschung (GfR), vol. 40(2), pages 113-136, October.
    7. Foley, Duncan K. & Rezai, Armon & Taylor, Lance, 2013. "The social cost of carbon emissions: Seven propositions," Economics Letters, Elsevier, vol. 121(1), pages 90-97.
    8. Kelly, David L. & Tan, Zhuo, 2015. "Learning and climate feedbacks: Optimal climate insurance and fat tails," Journal of Environmental Economics and Management, Elsevier, vol. 72(C), pages 98-122.
    9. Hwang, In Chang, 2014. "Fat-tailed uncertainty and the learning-effect," MPRA Paper 53671, University Library of Munich, Germany.
    10. In Hwang & Frédéric Reynès & Richard Tol, 2013. "Climate Policy Under Fat-Tailed Risk: An Application of Dice," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 56(3), pages 415-436, November.
    11. Masako Ikefuji & Roger Laeven & Jan Magnus & Chris Muris, 2014. "Expected Utility and Catastrophic Risk," Tinbergen Institute Discussion Papers 14-133/III, Tinbergen Institute.
    12. Matthias Schmidt & Hermann Held & Elmar Kriegler & Alexander Lorenz, 2013. "Climate Policy Under Uncertain and Heterogeneous Climate Damages," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 54(1), pages 79-99, January.
    13. Seth D. Baum & Timothy M. Maher & Jacob Haqq-Misra, 2013. "Double catastrophe: intermittent stratospheric geoengineering induced by societal collapse," Environment Systems and Decisions, Springer, vol. 33(1), pages 168-180, March.
    14. Benjamin Jones & Michael Keen & Jon Strand, 2013. "Fiscal implications of climate change," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 20(1), pages 29-70, February.
    15. Nordhaus, William, 2013. "Integrated Economic and Climate Modeling," Handbook of Computable General Equilibrium Modeling, in: Peter B. Dixon & Dale Jorgenson (ed.), Handbook of Computable General Equilibrium Modeling, edition 1, volume 1, chapter 0, pages 1069-1131, Elsevier.
    16. Dellink, Rob & Finus, Michael, 2012. "Uncertainty and climate treaties: Does ignorance pay?," Resource and Energy Economics, Elsevier, vol. 34(4), pages 565-584.
    17. Richard S.J. Tol, 2021. "Estimates of the social cost of carbon have not changed over time," Working Paper Series 0821, Department of Economics, University of Sussex Business School.
    18. Sussman Fran & Weaver Christopher P. & Grambsch Anne, 2014. "Challenges in applying the paradigm of welfare economics to climate change," Journal of Benefit-Cost Analysis, De Gruyter, vol. 5(3), pages 347-376, December.
    19. Bond, Craig A. & Iverson, Terrence, 2011. "Modeling Information in Environmental Decision-Making," Western Economics Forum, Western Agricultural Economics Association, vol. 10(2), pages 1-17.
    20. Fernández, Jorge & Miller, Sebastián J., 2011. "When Should Developing Countries Announce Their Climate Policy?," IDB Publications (Working Papers) 3960, Inter-American Development Bank.

    More about this item

    Keywords

    Decisions under uncertainty; Cost–benefit-analysis; Climate policy; Dismal theorem;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:eneeco:v:42:y:2014:i:c:p:201-203. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eneco .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.