Climate Policy Under Fat-Tailed Risk: An Application of Dice
Uncertainty plays a significant role in evaluating climate policy, and fat-tailed uncertainty may dominate policy advice. Should we make our utmost effort to prevent the arbitrarily large impacts of climate change under deep uncertainty? In order to answer to this question, we propose a new way of investigating the impact of (fat-tailed) uncertainty on optimal climate policy: the curvature of the optimal carbon tax against the uncertainty. We find that the optimal carbon tax increases as the uncertainty about climate sensitivity increases, but it does not accelerate as implied by Weitzman’s Dismal Theorem. We find the same result in a wide variety of sensitivity analyses. These results emphasize the importance of balancing the costs of climate change against its benefits, also under deep uncertainty. Copyright Springer Science+Business Media Dordrecht 2013
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 56 (2013)
Issue (Month): 3 (November)
|Contact details of provider:|| Web page: http://www.springerlink.com/link.asp?id=100263|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Thomas Sterner & U. Martin Persson, 2008. "An Even Sterner Review: Introducing Relative Prices into the Discounting Debate," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 2(1), pages 61-76, Winter.
- Kolstad, Charles D., 1996. "Learning and Stock Effects in Environmental Regulation: The Case of Greenhouse Gas Emissions," Journal of Environmental Economics and Management, Elsevier, vol. 31(1), pages 1-18, July.
- repec:dgr:kubcen:2010122 is not listed on IDEAS
- Stephen Newbold & Adam Daigneault, 2009. "Climate Response Uncertainty and the Benefits of Greenhouse Gas Emissions Reductions," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 44(3), pages 351-377, November.
- Andrew J. Leach, 2004.
"The Climate Change Learning Curve,"
Cahiers de recherche
04-03, HEC Montréal, Institut d'économie appliquée.
- Robert S. Pindyck, 2010.
"Fat Tails, Thin Tails, and Climate Change Policy,"
NBER Working Papers
16353, National Bureau of Economic Research, Inc.
- Alberth, Stephan & Hope, Chris, 2007. "Climate modelling with endogenous technical change: Stochastic learning and optimal greenhouse gas abatement in the PAGE2002 model," Energy Policy, Elsevier, vol. 35(3), pages 1795-1807, March.
- Marten, Alex L., 2011.
"Transient temperature response modeling in IAMs: the effects of over simplification on the SCC,"
Economics Discussion Papers
2011-11, Kiel Institute for the World Economy.
- Marten, Alex L., 2011. "Transient temperature response modeling in IAMs: The effects of over simplification on the SCC," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 5, pages 1-42.
- Richard S.J. Tol, 2012.
"Targets for Global Climate Policy: An Overview,"
Working Paper Series
3712, Department of Economics, University of Sussex.
- Richard S. J. Tol, 2009. "The Economic Effects of Climate Change," Journal of Economic Perspectives, American Economic Association, vol. 23(2), pages 29-51, Spring.
- Anthony Fisher & Urvashi Narain, 2003. "Global Warming, Endogenous Risk, and Irreversibility," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 25(4), pages 395-416, August.
- Alistair Ulph & David Maddison, 1997.
"Uncertainty, learning and international environmental policy coordination,"
Environmental & Resource Economics,
European Association of Environmental and Resource Economists, vol. 9(4), pages 451-466, June.
- Ulph, A. & Maddison, D., 1995. "Uncertainty, learning and international environmental policy co-ordination," Discussion Paper Series In Economics And Econometrics 9507, Economics Division, School of Social Sciences, University of Southampton.
- Pizer, William A., 1999. "The optimal choice of climate change policy in the presence of uncertainty," Resource and Energy Economics, Elsevier, vol. 21(3-4), pages 255-287, August.
- Keller, Klaus & Bolker, Benjamin M. & Bradford, D.F.David F., 2004. "Uncertain climate thresholds and optimal economic growth," Journal of Environmental Economics and Management, Elsevier, vol. 48(1), pages 723-741, July.
- Martin L. Weitzman, 2012.
"GHG Targets as Insurance Against Catastrophic Climate Damages,"
Journal of Public Economic Theory,
Association for Public Economic Theory, vol. 14(2), pages 221-244, 03.
- Martin L. Weitzman, 2010. "GHG Targets as Insurance Against Catastrophic Climate Damages," NBER Working Papers 16136, National Bureau of Economic Research, Inc.
- Weitzman, Martin L., 2012. "GHG Targets as Insurance Against Catastrophic Climate Damages," Scholarly Articles 11315435, Harvard University Department of Economics.
- Salmon, Mark, 1982.
"Error Correction Mechanisms,"
The Warwick Economics Research Paper Series (TWERPS)
199, University of Warwick, Department of Economics.
- Jon Gjerde & Sverre Grepperud & Snorre Kverndokk, 1998.
"Optimal Climate Policy under the Possibility of a Catastrophe,"
209, Research Department of Statistics Norway.
- Gjerde, Jon & Grepperud, Sverre & Kverndokk, Snorre, 1999. "Optimal climate policy under the possibility of a catastrophe," Resource and Energy Economics, Elsevier, vol. 21(3-4), pages 289-317, August.
- Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
- Peck, Stephen C. & Teisberg, Thomas J., 1993. "Global warming uncertainties and the value of information: an analysis using CETA," Resource and Energy Economics, Elsevier, vol. 15(1), pages 71-97, March.
- Baranzini, Andrea & Chesney, Marc & Morisset, Jacques, 2003. "The impact of possible climate catastrophes on global warming policy," Energy Policy, Elsevier, vol. 31(8), pages 691-701, June.
- Pycroft, Jonathan & Vergano, Lucia & Hope, Chris & Paci, Daniele & Ciscar, Juan Carlos, 2011.
"A tale of tails: Uncertainty and the social cost of carbon dioxide,"
Economics - The Open-Access, Open-Assessment E-Journal,
Kiel Institute for the World Economy, vol. 5, pages 1-29.
- Pycroft, Jonathan & Vergano, Lucia & Hope, Chris & Paci, Daniele & Ciscar, Juan Carlos, 2011. "A tale of tails: Uncertainty and the social cost of carbon dioxide," Economics Discussion Papers 2011-36, Kiel Institute for the World Economy.
- Kelly, David L. & Kolstad, Charles D., 1999. "Bayesian learning, growth, and pollution," Journal of Economic Dynamics and Control, Elsevier, vol. 23(4), pages 491-518, February.
When requesting a correction, please mention this item's handle: RePEc:kap:enreec:v:56:y:2013:i:3:p:415-436. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Guenther Eichhorn)or (Christopher F. Baum)
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 references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.