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

Author

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  • 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 - CNRS - Centre National de la Recherche Scientifique - UP1 - Université Panthéon-Sorbonne, 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.

Suggested Citation

  • Antoine Bommier & Bruno Lanz & Stéphane Zuber, 2014. "Models-as-Usual for Unusual Risks? On the Value of Catastrophic Climate Change," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00973491, HAL.
  • Handle: RePEc:hal:cesptp:halshs-00973491
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00973491
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    References listed on IDEAS

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    Cited by:

    1. Aurélie Méjean & Antonin Pottier & Stéphane Zuber & Marc Fleurbaey, 2015. "Intergenerational equity under catastrophic climate change," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01677308, HAL.
    2. Can Askan Mavi, 2016. "Uncertain Catastrophic Events : Another Source of Environmental Traps ?," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01275174, HAL.
    3. repec:eee:ecolec:v:141:y:2017:i:c:p:245-260 is not listed on IDEAS
    4. Aurélie Méjean & Antonin Pottier & Stéphane Zuber & Marc Fleurbaey, 2015. "Intergenerational equity under catastrophic climate change," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01677308, HAL.
    5. repec:eee:matsoc:v:87:y:2017:i:c:p:94-102 is not listed on IDEAS
    6. Can Askan Mavi, 2017. "What Can Abrupt Events Tell Us About Sustainability ?," Working Papers hal-01628682, HAL.
    7. Can Askan Mavi, 2016. "Uncertain Catastrophic Events : Another Source of Environmental Traps ?," Working Papers halshs-01275174, HAL.
    8. Lucas Bretschger & Alexandra Vinogradova, 2014. "Growth and Mitigation Policies with Uncertain Climate Damage," CESifo Working Paper Series 5085, CESifo Group Munich.
    9. Aurélie Méjean & Antonin Pottier & Stéphane Zuber & Marc Fleurbaey, 2015. "Intergenerational equity under catastrophic climate change," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01677308, HAL.
    10. Can Askan Mavi, 2017. "Can a hazardous event be another source of poverty traps ?," Working Papers 2017.14, FAERE - French Association of Environmental and Resource Economists.

    More about this item

    Keywords

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

    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 - - Micro-Based Behavioral Economics - - - 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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