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Toward Impact Functions For Stochastic Climate Change

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  • FRANCISCO ESTRADA

    (Institute for Environmental Studies, Vrije Universiteit, Amsterdam, The Netherlands†Centro de Ciencias de la Atmósfera, Universidad Nacional Autónoma de México, Mexico)

  • RICHARD S. J. TOL

    (Institute for Environmental Studies, Vrije Universiteit, Amsterdam, The Netherlands†Centro de Ciencias de la Atmósfera, Universidad Nacional Autónoma de México, Mexico‡Department of Economics, University of Sussex, Falmer, United Kingdom§Department of Spatial Economics, Vrije Universiteit, Amsterdam, The Netherlands¶Tinbergen Institute, Amsterdam, The Netherlands∥CESifo, Munich, Germany)

Abstract

Most functions of economic impact assume that climate change is smooth. We here propose impact functions that have stochastic climate change as an input. These functions are identical in shape and have similar parameters as do deterministic impact functions. The mean stochastic impacts are thus similar to deterministic impacts. Welfare effects are larger, and the stochasticity premium is larger than the risk premium. Results suggest that stochasticity is more important for past impacts than for future impacts. This outcome is partly caused by an underestimation of natural variability in the 21st century climate projections.

Suggested Citation

  • Francisco Estrada & Richard S. J. Tol, 2015. "Toward Impact Functions For Stochastic Climate Change," Climate Change Economics (CCE), World Scientific Publishing Co. Pte. Ltd., vol. 6(04), pages 1-13, November.
    • Handle: RePEc:wsi:ccexxx:v:06:y:2015:i:04:n:s2010007815500153
    DOI: 10.1142/S2010007815500153
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    References listed on IDEAS

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    1. Stephen H. Schneider, 2001. "What is 'dangerous' climate change?," Nature, Nature, vol. 411(6833), pages 17-19, May.
    2. Richard S.J. Tol & Francisco Estrada, 2013. "Estimating the Global Impacts of Climate Variability and Change During the 20th Century," Working Paper Series 6213, Department of Economics, University of Sussex Business School.
    3. Dalton, Michael G., 1997. "The Welfare Bias from Omitting Climatic Variability in Economic Studies of Global Warming," Journal of Environmental Economics and Management, Elsevier, vol. 33(3), pages 221-239, July.
    4. Myles R. Allen, 2003. "Climate forecasting: Possible or probable?," Nature, Nature, vol. 425(6955), pages 242-242, September.
    5. Richard S. J. Tol, 2014. "Correction and Update: The Economic Effects of Climate Change," Journal of Economic Perspectives, American Economic Association, vol. 28(2), pages 221-226, Spring.
    6. 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.
    7. Jamie Sanderson & Sardar M. N. Islam, 2007. "Climate Change and Economic Development," Palgrave Macmillan Books, Palgrave Macmillan, number 978-0-230-59012-0, October.
    8. Joeri Rogelj & Malte Meinshausen & Reto Knutti, 2012. "Global warming under old and new scenarios using IPCC climate sensitivity range estimates," Nature Climate Change, Nature, vol. 2(4), pages 248-253, April.
    9. Richard Tol, 2012. "On the Uncertainty About the Total Economic Impact of Climate Change," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 53(1), pages 97-116, September.
    10. Richard Tol, 2013. "The economic impact of climate change in the 20th and 21st centuries," Climatic Change, Springer, vol. 117(4), pages 795-808, April.
    11. Matthew H. England & Shayne McGregor & Paul Spence & Gerald A. Meehl & Axel Timmermann & Wenju Cai & Alex Sen Gupta & Michael J. McPhaden & Ariaan Purich & Agus Santoso, 2014. "Recent intensification of wind-driven circulation in the Pacific and the ongoing warming hiatus," Nature Climate Change, Nature, vol. 4(3), pages 222-227, March.
    12. Thomas S. Lontzek & Yongyang Cai & Kenneth L. Judd & Timothy M. Lenton, 2015. "Stochastic integrated assessment of climate tipping points indicates the need for strict climate policy," Nature Climate Change, Nature, vol. 5(5), pages 441-444, May.
    13. Yongyang Cai & Kenneth L. Judd & Thomas S. Lontzek, 2012. "Open science is necessary," Nature Climate Change, Nature, vol. 2(5), pages 299-299, May.
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    Cited by:

    1. David Anthoff & Francisco Estrada & Richard S. J. Tol, 2016. "Shutting Down the Thermohaline Circulation," American Economic Review, American Economic Association, vol. 106(5), pages 602-606, May.
    2. Richard S.J. Tol, 2020. "The Economic Impact of Weather and Climate," Video Library 2094, Department of Economics, University of Sussex Business School.
    3. Francisco Estrada & Richard S.J. Tol & Wouter Botzen, "undated". "Economic consequences of the spatial and temporal variability of climate change," Working Paper Series 0123, Department of Economics, University of Sussex Business School.
    4. David Anthoff & Francisco Estrada & Richard S. J. Tol, 2016. "Shutting Down the Thermohaline Circulation," American Economic Review, American Economic Association, vol. 106(5), pages 602-06, May.
    5. Francisco Estrada & Richard S J Tol & Wouter J W Botzen, 2017. "Global economic impacts of climate variability and change during the 20th century," PLOS ONE, Public Library of Science, vol. 12(2), pages 1-16, February.

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    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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