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Risk Aversion, Intergenerational Equity and Climate Change

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Listed author(s):
  • Minh Ha-Duong

    ()

  • Nicolas Treich

Abstract

The paper investigates a climate-economy model with an iso-elastic welfare function in which one parameter γ measures relative risk-aversion and a distinct parameter ρ measures resistance to intertemporal substitution.We show both theoretically and numerically that climate policy responds differently to variations in the two parameters. In particular, we show that higher γ but lower ρ leads to increase emissions control. We also argue that climate-economy models based on intertemporal expected utility maximization, i.e. models where γ=ρ, may misinterpret the sensitivity of the climate policy to risk-aversion. Copyright Kluwer Academic Publishers 2004

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File URL: http://hdl.handle.net/10.1023/B:EARE.0000029915.04325.25
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Article provided by Springer & European Association of Environmental and Resource Economists in its journal Environmental and Resource Economics.

Volume (Year): 28 (2004)
Issue (Month): 2 (June)
Pages: 195-207

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Handle: RePEc:kap:enreec:v:28:y:2004:i:2:p:195-207
DOI: 10.1023/B:EARE.0000029915.04325.25
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Keywords: climate change; discounting; equity; risk-aversion;

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  1. Robert B. Barsky & Miles S. Kimball & F. Thomas Juster & Matthew D. Shapiro, 1995. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Survey," NBER Working Papers 5213, National Bureau of Economic Research, Inc.
  2. Masao Ogaki & Carmen M. Reinhart, 1998. "Measuring Intertemporal Substitution: The Role of Durable Goods," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 1078-1098, October.
  3. Minh Ha-Duong & Michael Grubb & Jean Charles Hourcade, 1997. "Influence of socioeconomic inertia and uncertainty on optimal CO2-emission abatement," Post-Print halshs-00002452, HAL.
  4. Minh Ha-Duong & Nicolas Treich, 1999. "Recursive Intergenerational Utility in Global Climate Risk Modeling," CIRANO Working Papers 99s-40, CIRANO.
  5. Michel Normandin & Pascal St-Amour, 1998. "Substitution, risk aversion, taste shocks and equity premia," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 13(3), pages 265-281.
  6. Gollier, Christian, 2002. "Discounting an uncertain future," Journal of Public Economics, Elsevier, vol. 85(2), pages 149-166, August.
  7. Kenneth J. Arrow, 1996. "Discounting, Morality, and Gaming," Working Papers 97004, Stanford University, Department of Economics.
  8. Robert B. Barsky & F. Thomas Juster & Miles S. Kimball & Matthew D. Shapiro, 1997. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Study," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 537-579.
  9. 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.
  10. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-357, April.
  11. Kreps, David M & Porteus, Evan L, 1978. "Temporal Resolution of Uncertainty and Dynamic Choice Theory," Econometrica, Econometric Society, vol. 46(1), pages 185-200, January.
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