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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. Gollier, Christian, 2002. "Discounting an uncertain future," Journal of Public Economics, Elsevier, vol. 85(2), pages 149-166, August.
  3. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-357, April.
  4. 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.
  5. 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.
  6. 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.
  7. Minh Ha-Duong & Nicolas Treich, 1999. "Recursive Intergenerational Utility in Global Climate Risk Modeling," CIRANO Working Papers 99s-40, CIRANO.
  8. Kenneth J. Arrow, 1996. "Discounting, Morality, and Gaming," Working Papers 97004, Stanford University, Department of Economics.
  9. 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.
  10. 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.
  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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