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Models-as-Usual for Unusual Risks? On the Value of Catastrophic Climate Change

Author Info

Listed author(s):
  • Antoine Bommier

    ()

    (Chair for Integrative Risk Management and Economics - ETH Zürich - Eidgenössische Technische Hochschule [Zürich])

  • Bruno Lanz

    ()

    (Center for International Environmental Studies - Graduate Institute Geneva)

  • Stéphane Zuber

    ()

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics)

Abstract

We study the role of alternative intertemporal preference representations in a model of economic growth, stock pollutant and endogenous risk of catastrophic collapse. We contrast the traditional "discounted utility" model, which assumes risk neutrality with respect to intertemporal utility, with a multiplicative choice model that displays risk aversion in that dimension. First, we show that both representations of preferences can rationalize the same "business as usual" economy for a given interest rate and no pollution externality. Second, once we introduce a collapse risk whose hazard rate is a function of the pollution stock, multiplicative preferences recommend a much more stringent policy response. An illustration in the context of climate change indicates that switching to the multiplicative preference representation has a similar effect, in terms of policy recommendations, as scaling up the schedule of the hazard rate by a factor of 100.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00973491.

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Length:
Date of creation: Mar 2014
Publication status: Published in Documents de travail du Centre d'Economie de la Sorbonne 2014.17 - ISSN : 1955-611X. 2014
Handle: RePEc:hal:cesptp:halshs-00973491
Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00973491
Contact details of provider: Web page: https://hal.archives-ouvertes.fr/

Keywords: Environmental policy; climate change; catastrophic risks; risk aversion; discounting; escompte; risques catastrophiques; aversion pour le risque; changement climatique; Politique environnementale;

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Find related papers by JEL classification:
  • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
  • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
  • D99 - Microeconomics - - Intertemporal Choice - - - Other
  • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
  • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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Cited by:

  1. Can Askan Mavi, 2016. "Uncertain Catastrophic Events : Another Source of Environmental Traps ?," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01275174, HAL.
  2. repec:hal:wpaper:halshs-01275174 is not listed on IDEAS
  3. Lucas Bretschger & Alexandra Vinogradova, 2014. "Growth and Mitigation Policies with Uncertain Climate Damage," CESifo Working Paper Series 5085, CESifo Group Munich.
  4. repec:eee:matsoc:v:87:y:2017:i:c:p:94-102 is not listed on IDEAS

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