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Additive damages, fat-tailed climate dynamics, and uncertain discounting

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  • Weitzman, Martin L.

Abstract

This paper in applied theory argues that there is a loose chain of reasoning connecting the following three basic links in the economics of climate change: 1) additive disutility damages may be appropriate for analyzing some impacts of global warming; 2) an uncertain feedback-forcing coefficient, which might be near one with infinitesimal probability, can cause the distribution of the future time trajectory of global temperatures to have fat tails and a high variance; 3) when high-variance additive damages are discounted at an uncertain rate of pure time preference, which might be near zero with infinitesimal probability, it can make expected present discounted disutility very large. Some possible implications for welfare analysis and climate-change policy are briefly noted.

Suggested Citation

  • Weitzman, Martin L., 2009. "Additive damages, fat-tailed climate dynamics, and uncertain discounting," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 3, pages 1-29.
  • Handle: RePEc:zbw:ifweej:200939
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    File URL: http://dx.doi.org/10.5018/economics-ejournal.ja.2009-39
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    File URL: https://www.econstor.eu/bitstream/10419/28955/1/614386799.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. Martin L. Weitzman, 2009. "On Modeling and Interpreting the Economics of Catastrophic Climate Change," The Review of Economics and Statistics, MIT Press, vol. 91(1), pages 1-19, February.
    3. Partha Dasgupta, 2007. "Commentary: The Stern Review's Economics of Climate Change," National Institute Economic Review, National Institute of Economic and Social Research, vol. 199(1), pages 4-7, January.
    4. 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.
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    Citations

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    Cited by:

    1. Wei, Yi-Ming & Mi, Zhi-Fu & Huang, Zhimin, 2015. "Climate policy modeling: An online SCI-E and SSCI based literature review," Omega, Elsevier, vol. 57(PA), pages 70-84.
    2. Yu-Fu Chen & Michael Funke & Nicole Glanemann, 2011. "Time is Running Out: The 2°C Target and Optimal Climate Policies," Dundee Discussion Papers in Economics 262, Economic Studies, University of Dundee.
    3. Armon Rezai & Frederick van der Ploeg & Cees Withagen, 2012. "The Optimal Carbon Tax and Economic Growth: Additive versus multiplicative damages," OxCarre Working Papers 093, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
    4. Alfred Endres & Tim Friehe, 2015. "The Compensation Regime in Liability Law: Incentives to Curb Environmental Harm, Ex Ante and Ex Post," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 62(1), pages 105-123, September.
    5. Millner, Antony, 2013. "On welfare frameworks and catastrophic climate risks," Journal of Environmental Economics and Management, Elsevier, vol. 65(2), pages 310-325.
    6. He, Fei & Zhuang, Jun, 2016. "Balancing pre-disaster preparedness and post-disaster relief," European Journal of Operational Research, Elsevier, vol. 252(1), pages 246-256.
    7. Robert S. Pindyck, 2011. "Modeling the Impact of Warming in Climate Change Economics," NBER Chapters,in: The Economics of Climate Change: Adaptations Past and Present, pages 47-71 National Bureau of Economic Research, Inc.
    8. 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, March.
    9. Weitzman, Martin L., 2010. "Risk-adjusted gamma discounting," Journal of Environmental Economics and Management, Elsevier, vol. 60(1), pages 1-13, July.
    10. Tol, Richard S.J., 2013. "Targets for global climate policy: An overview," Journal of Economic Dynamics and Control, Elsevier, vol. 37(5), pages 911-928.
    11. Chen, Yu-Fu & Funke, Michael & Glanemann, Nicole, 2011. "Dark Clouds or Silver Linings? Knightian Uncertainty and Climate Change," SIRE Discussion Papers 2011-64, Scottish Institute for Research in Economics (SIRE).
    12. David Hendry, 2010. "Climate Change: Lessons for our Future from the Distant Past," Economics Series Working Papers 485, University of Oxford, Department of Economics.
    13. Alfred Endres & Tim Friehe, 2012. "Generalized Progress of Abatement Technology: Incentives Under Environmental Liability Law," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 53(1), pages 61-71, September.
    14. Stern, David I., 2012. "Modeling international trends in energy efficiency," Energy Economics, Elsevier, vol. 34(6), pages 2200-2208.
    15. Pindyck, Robert S., 2012. "Uncertain outcomes and climate change policy," Journal of Environmental Economics and Management, Elsevier, vol. 63(3), pages 289-303.
    16. Christian Traeger, 2014. "Why uncertainty matters: discounting under intertemporal risk aversion and ambiguity," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 56(3), pages 627-664, August.
    17. Kopp, Robert E. & Golub, Alexander & Keohane, Nathaniel O. & Onda, Chikara, 2012. "The influence of the specification of climate change damages on the social cost of carbon," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 6, pages 1-40.
    18. Boyarchenko, Svetlana & Levendorskii, Sergei, 2010. "Discounting when income is stochastic and climate change policies," MPRA Paper 27998, University Library of Munich, Germany.
    19. Emanuele Massetti & Elena Claire Ricci, 2011. "Super-Grids and Concentrated Solar Power: A Scenario Analysis with the WITCH Model," Working Papers 2011.47, Fondazione Eni Enrico Mattei.
    20. Norman Schofield, 2015. "Climate Change, Collapse and Social Choice Theory," Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 9(1), pages 007-035, October.
    21. Arvaniti, Maria, 2016. "Uncertainty, Extreme Outcomes and Climate Change: a critique," CERE Working Papers 2016:11, CERE - the Center for Environmental and Resource Economics.

    More about this item

    Keywords

    Climate change; fat tails;

    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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