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Climate Change Catastrophes


  • Pizer, William

    () (Resources for the Future)


Most studies that compare price and quantity controls for greenhouse gas emissions under uncertainty find that price mechanisms perform substantially better. In these studies, the benefits from reducing emissions are proportional to the level of reductions, and such linear benefits strongly favor price policies (Weitzman 1974). Catastrophic damages, however, challenge that intuition as consequences become highly nonlinear. Catastrophe avoidance offers huge benefits, and incremental adjustments on either side of the associated threshold are relatively unimportant, suggesting a strong preference for quantity controls. This paper shows that with catastrophic damages, both price and quantity mechanisms offer large gains over the business-as-usual alternative, and the difference between policies is never more than 10%. Catastrophe avoidance is much more important than efficient catastrophe avoidance. Although previous studies favoring price policies in the presence of uncertainty have worried that catastrophes would reverse their results, this analysis indicates that such concerns are not borne out.

Suggested Citation

  • Pizer, William, 2003. "Climate Change Catastrophes," Discussion Papers dp-03-31, Resources For the Future.
  • Handle: RePEc:rff:dpaper:dp-03-31

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    References listed on IDEAS

    1. Kolstad, Charles D., 1996. "Learning and Stock Effects in Environmental Regulation: The Case of Greenhouse Gas Emissions," Journal of Environmental Economics and Management, Elsevier, vol. 31(1), pages 1-18, July.
    2. Stavins, Robert N., 1996. "Correlated Uncertainty and Policy Instrument Choice," Journal of Environmental Economics and Management, Elsevier, vol. 30(2), pages 218-232, March.
    3. William D. Nordhaus & David Popp, 1997. "What is the Value of Scientific Knowledge? An Application to Global Warming Using the PRICE Model," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 1-45.
    4. Newell, Richard G. & Pizer, William A., 2003. "Regulating stock externalities under uncertainty," Journal of Environmental Economics and Management, Elsevier, vol. 45(2, Supple), pages 416-432, March.
    5. Hoel, Michael & Karp, Larry, 2002. "Taxes versus quotas for a stock pollutant," Resource and Energy Economics, Elsevier, vol. 24(4), pages 367-384, November.
    6. Pizer, William A., 1999. "The optimal choice of climate change policy in the presence of uncertainty," Resource and Energy Economics, Elsevier, vol. 21(3-4), pages 255-287, August.
    7. Pizer, William, 1997. "Prices vs. Quantities Revisited: The Case of Climate Change," Discussion Papers dp-98-02, Resources For the Future.
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    Cited by:

    1. Halkos, George, 2014. "The Economics of Climate Change Policy: Critical review and future policy directions," MPRA Paper 56841, University Library of Munich, Germany.
    2. Robert S. Pindyck, 2006. "Uncertainty In Environmental Economics," NBER Working Papers 12752, National Bureau of Economic Research, Inc.
    3. Halkos, George, 2013. "Uncertainty in optimal pollution levels: Modeling the benefit area," MPRA Paper 47768, University Library of Munich, Germany.

    More about this item


    climate change; global warming; prices versus quantities; stock externalities; integrated assessment; uncertainty;

    JEL classification:

    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models

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