Optimal Climate Policy for a Pessimistic Social Planner
In this paper we characterize the preferences of a pessimistic social planner concerned with the potential costs of extreme, low-probability climate events. This pessimistic attitude is represented by a recursive optimization criterion à la Hansen and Sargent (1995) that introduces supplementary curvature in the social preferences of standard linear-quadratic optimization analysis and, under certain conditions, it can be shown to correspond to the Epstein-Zin recursive utility. The introduction of extra convexity and the separation between risk-aversion and time-preference implies that, independently of the choice of the discount rate, a sharp, early and steady mitigation effort arises as the optimal climate policy, supporting the main recommendation of the Stern Review (Stern, 2007). Nonetheless, we accommodate for its main criticism of using a too low and questionable discount rate (Nordhaus, 2007), while preserving the assumption of a normal (thin-tailed) probability distribution (Weitzman, 2009). Finally, we argue that our theoretical framework is sufficiently general and robust to possible mis-specifications of the model.
|Date of creation:||Mar 2014|
|Date of revision:|
|Contact details of provider:|| Postal: Corso Magenta, 63 - 20123 Milan|
Web page: http://www.feem.it/
More information through EDIRC
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.:
- Antony Millner, 2013. "On Welfare Frameworks and Catastrophic Climate Risks," CESifo Working Paper Series 4442, CESifo Group Munich.
- Robert S. Pindyck & Neng Wang, 2009.
"The Economic and Policy Consequences of Catastrophes,"
NBER Working Papers
15373, National Bureau of Economic Research, Inc.
- Robert S. Pindyck & Neng Wang, 2013. "The Economic and Policy Consequences of Catastrophes," American Economic Journal: Economic Policy, American Economic Association, vol. 5(4), pages 306-39, November.
- Robert S. Pindyck, 2009. "The Economic and Policy Consequences of Catastrophes," Working Papers 0912, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
- Millner, Antony, 2013. "On welfare frameworks and catastrophic climate risks," Journal of Environmental Economics and Management, Elsevier, vol. 65(2), pages 310-325.
- Buchholz, Wolfgang & Schymura, Michael, 2010.
"Expected Utility theory and the tyranny of catastrophic risks,"
ZEW Discussion Papers
10-059, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
- Buchholz, Wolfgang & Schymura, Michael, 2012. "Expected utility theory and the tyranny of catastrophic risks," Ecological Economics, Elsevier, vol. 77(C), pages 234-239.
- Etienne Espagne & Baptiste Perrissin Fabert & Antonin Pottier & Franck Nadaud & Patrice Dumas, 2012.
"Disentangling the Stern/Nordhaus Controversy: Beyond the Discounting Clash,"
2012.61, Fondazione Eni Enrico Mattei.
- Etienne Espagne & Baptiste Perrissin Fabert & Antonin Pottier & Franck Nadaud & Patrice Dumas, 2012. "Disentangling the Stern/Nordhaus Controversy : Beyond the Discounting Clash," Post-Print hal-00804294, HAL.
- Athanassoglou, Stergios & Xepapadeas, Anastasios, 2012. "Pollution control with uncertain stock dynamics: When, and how, to be precautious," Journal of Environmental Economics and Management, Elsevier, vol. 63(3), pages 304-320.
- de Zeeuw, Aart & Zemel, Amos, 2012.
"Regime shifts and uncertainty in pollution control,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 36(7), pages 939-950.
- Aart de Zeeuw & Amos Zemel, 2012. "Regime Shifts and Uncertainty in Pollution Control," CESifo Working Paper Series 3697, CESifo Group Munich.
- Derek Lemoine & Christian Traeger, 2014. "Watch Your Step: Optimal Policy in a Tipping Climate," American Economic Journal: Economic Policy, American Economic Association, vol. 6(1), pages 137-66, February.
- Svenja Hector, 2013. "Accounting for Different Uncertainties: Implications for Climate Investments?," Working Papers 2013.107, Fondazione Eni Enrico Mattei.
- In Hwang & Frédéric Reynès & Richard Tol, 2013.
"Climate Policy Under Fat-Tailed Risk: An Application of Dice,"
Environmental & Resource Economics,
European Association of Environmental and Resource Economists, vol. 56(3), pages 415-436, November.
- 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).
- Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, vol. 57(4), pages 937-69, July.
- Thomas Tallarini, .
"Risk-Sensitive Real Business Cycles,"
GSIA Working Papers
1997-35, Carnegie Mellon University, Tepper School of Business.
When requesting a correction, please mention this item's handle: RePEc:fem:femwpa:2014.33. 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: (barbara racah)
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.