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Risk aversion - a necessary condition for limiting global environmental risks?

  • Ohl, Cornelia
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    Standard risk economic analysis suggests that global environmental risk is lower in the case of risk aversion than in the case of risk neutrality or risk seeking. Maybe the reason why the Advisory Council of the German Government on Global Environmental Change (WBGU) explicitly recommends to behave as a risk averter when dealing with problems of global risk management. However risk aversion not always guaranties the limitation of a global pollutant, like CO2. To show this the paper focuses on two different landscapes of risk that are motivated by aspects of ecological vulnerability of the nations as well as the country-specific abilities to cope with environmental change. Each is defined in terms of the means – and of the standard deviation ó of the national welfare distributions in different states of emission behaviour. The nations under consideration are either risk neutral, risk averse or risk seeking and are sovereign in taking measures of global risk reduction. Following the assumption of expected utility maximisation it is revealed that taking and enforcing measures of risk reduction critically depend on the interplay of the subjective risk preferences and the landscape of risk induced by the effects of global risk control. Hence, given the national risk preferences, it is the landscape of risk that determines the co-operative power of national risk attitudes and with it attributes the nations as environmental-friendly or not.

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    File URL: http://econstor.eu/bitstream/10419/19351/1/190.pdf
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    Paper provided by Hamburg Institute of International Economics (HWWA) in its series HWWA Discussion Papers with number 190.

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    Date of creation: 2002
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    Handle: RePEc:zbw:hwwadp:26360
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    Web page: http://www.econstor.eu/handle/10419/20
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    1. Fisher, Anthony C., 2000. "Investment under uncertainty and option value in environmental economics," Resource and Energy Economics, Elsevier, vol. 22(3), pages 197-204, July.
    2. Barrett, Scott, 1994. "Self-Enforcing International Environmental Agreements," Oxford Economic Papers, Oxford University Press, vol. 46(0), pages 878-94, Supplemen.
    3. Dasgupta, P., 1990. "The Environment as Commodity.i," Research Paper 84, World Institute for Development Economics Research.
    4. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
    5. Oleg Eismont & Heinz Welsch, 1996. "Optimal greenhouse gas emissions under various assessments of climate change ambiguity," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 8(2), pages 129-140, September.
    6. Roughgarden, Tim & Schneider, Stephen H., 1999. "Climate change policy: quantifying uncertainties for damages and optimal carbon taxes," Energy Policy, Elsevier, vol. 27(7), pages 415-429, July.
    7. Chichilnisky, Graciela, 2000. "An axiomatic approach to choice under uncertainty with catastrophic risks," Resource and Energy Economics, Elsevier, vol. 22(3), pages 221-231, July.
    8. Dasgupta, Partha, 1990. "The Environment as a Commodity," Oxford Review of Economic Policy, Oxford University Press, vol. 6(1), pages 51-67, Spring.
    9. Benedick, Richard Elliot, 1999. "Contrasting approaches: the ozone layer, climate change, and resolving the Kyoto dilemma," Discussion Papers, Research Professorship Environmental Policy FS II 99-404, Social Science Research Center Berlin (WZB).
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