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

  • Antoine Bommier

    ()

    (Chair for Integrative Risk Management and Economics - ETH ZURICH)

  • 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, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics)

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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Date of creation: Mar 2014
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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
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