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Uncertain outcomes and climate change policy

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  • Pindyck, Robert S.

Abstract

I incorporate distributions for temperature change and its economic impact in an analysis of climate change policy. As a measure of willingness to pay (WTP), I estimate the fraction of consumption w⁎(τ) that society would be willing to sacrifice to ensure that any increase in temperature at a future point is limited to τ. Using information on distributions for temperature change and economic impact from recent studies assembled by the IPCC and others, I fit displaced gamma distributions for these variables. These fitted distributions, which roughly reflect the “state of knowledge” regarding warming and its impact, generally yield values of w⁎(τ) below 2%, even for small values of τ, consistent with moderate abatement policies. I also calculate WTP for shifts in the mean and standard deviation of the temperature distribution, and show how WTP, and thus the demand for abatement, are driven more by outcome uncertainty than expected outcomes.

Suggested Citation

  • Pindyck, Robert S., 2012. "Uncertain outcomes and climate change policy," Journal of Environmental Economics and Management, Elsevier, vol. 63(3), pages 289-303.
  • Handle: RePEc:eee:jeeman:v:63:y:2012:i:3:p:289-303
    DOI: 10.1016/j.jeem.2011.12.001
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    More about this item

    Keywords

    Environmental policy; Climate change; Global warming; Economic impact; Uncertainty; Catastrophic outcomes; Willingness to pay;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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