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Fat-tailed risk about climate change and climate policy

Listed author(s):
  • Hwang, In Chang
  • Tol, Richard S.J.
  • Hofkes, Marjan W.

This paper investigates the role of emissions control in welfare maximization under fat-tailed risk about climate change. We provide a classification of fat tails and discuss the effect of fat-tailed risk on climate policy. One of the main findings is that emissions control may prevent the “strong” tail-effect from arising, at least under some conditions such as bounded temperature increases, low risk aversion, low damage costs, and bounded utility function. More specifically, the fat-tailed risk with respect to a climate parameter does not necessarily lead to an unbounded carbon tax. In this case, the basic principle of cost-benefit analysis maintains its applicability.

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File URL: http://www.sciencedirect.com/science/article/pii/S0301421515301907
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Article provided by Elsevier in its journal Energy Policy.

Volume (Year): 89 (2016)
Issue (Month): C ()
Pages: 25-35

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Handle: RePEc:eee:enepol:v:89:y:2016:i:c:p:25-35
DOI: 10.1016/j.enpol.2015.11.012
Contact details of provider: Web page: http://www.elsevier.com/locate/enpol

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  15. 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.
  16. Millner, Antony, 2013. "On welfare frameworks and catastrophic climate risks," Journal of Environmental Economics and Management, Elsevier, vol. 65(2), pages 310-325.
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  18. Richard S. J. Tol & In Chang Hwang & Frédéric Reynès, 2012. "The Effect of Learning on Climate Policy under Fat-tailed Uncertainty," Working Paper Series 5312, Department of Economics, University of Sussex.
  19. 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.
  20. 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.
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