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Climate Policy Under Fat-Tailed Risk: An Application of Dice

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  • Hwang, In Chang
  • Reynès, Frédéric
  • Tol, Richard S. J.

Abstract

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 an new way of investigating the impact of (fat-tailed) uncertainty on optimal climate policy: the curvature of 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 of the costs and the benefits of climate policy, also under deep uncertainty.

Suggested Citation

  • Hwang, In Chang & Reynès, Frédéric & Tol, Richard S. J., 2011. "Climate Policy Under Fat-Tailed Risk: An Application of Dice," Papers WP403, Economic and Social Research Institute (ESRI).
  • Handle: RePEc:esr:wpaper:wp403
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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, pages 70-84.
    2. Havranek, Tomas & Irsova, Zuzana & Janda, Karel & Zilberman, David, 2015. "Selective reporting and the social cost of carbon," Energy Economics, Elsevier, pages 394-406.
    3. In Chang Hwang, 2016. "Active learning and optimal climate policy," EcoMod2016 9611, EcoMod.
    4. repec:eee:resene:v:48:y:2017:i:c:p:1-18 is not listed on IDEAS
    5. Hwang, In Chang, 2014. "Fat-tailed uncertainty and the learning-effect," MPRA Paper 53671, University Library of Munich, Germany.
    6. W. Botzen & Jeroen Bergh, 2014. "Specifications of Social Welfare in Economic Studies of Climate Policy: Overview of Criteria and Related Policy Insights," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, pages 1-33.
    7. Davidson, Marc D., 2014. "Zero discounting can compensate future generations for climate damage," Ecological Economics, Elsevier, vol. 105(C), pages 40-47.
    8. Hwang, In Chang & Tol, Richard S.J. & Hofkes, Marjan W., 2016. "Fat-tailed risk about climate change and climate policy," Energy Policy, Elsevier, vol. 89(C), pages 25-35.
    9. Edilio Valentini & Paolo Vitale, 2014. "Optimal Climate Policy for a Pessimistic Social Planner," Working Papers 2014.33, Fondazione Eni Enrico Mattei.
    10. In Chang Hwang & Richard S.J. Tol & Marjan W. Hofkes, 2013. "Tail-effect and the Role of Greenhouse Gas Emissions Control," Working Paper Series 6613, Department of Economics, University of Sussex.

    More about this item

    Keywords

    Climate policy/Policy/risk/uncertainty/impacts/Impacts of climate change/Climate change/taxes/cost;

    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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