Models-as-usual for unusual risks? On the value of catastrophic climate change

Antoine Bommier, Bruno Lanz and Stéphane Zuber

Journal of Environmental Economics and Management, 2015, vol. 74, issue C, 1-22

Abstract: We study the role of intertemporal preference representations in a model of economic growth, stock pollutant and endogenous risk of catastrophic collapse. We contrast two polar instances of risk-sensitive preferences: the traditional “discounted utility” model, which imposes a positive rate of pure time preference and risk neutrality with respect to intertemporal utility, and multiplicatively separable preferences, which display risk aversion in that dimension but no pure time preferences. We show that both representations of preferences can rationalize the same economy when there is no collapse risk associated with pollution. Once we introduce a collapse risk whose hazard rate depends on the pollution stock, multiplicatively separable preferences are associated with a much higher value of catastrophic risk reduction, and a more stringent policy response. A relatively high discount rate may thus be compatible with large emissions abatement in the face of a low probability large impact event, reflecting preferences for catastrophic risk reduction.

Keywords: Environmental policy; Climate change; Catastrophic risks; Risk aversion; Risk-sensitive preferences; Discounting (search for similar items in EconPapers)
JEL-codes: D63 D81 D99 Q53 Q54 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

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Related works:
Working Paper: Models-as-usual for unusual risks? On the value of catastrophic climate change (2015)
Working Paper: Models-as-usual for unusual risks? On the value of catastrophic climate change (2015)
Working Paper: Models-as-usual for unusual risks? On the value of catastrophic climate change (2015)
Working Paper: Models-as-Usual for Unusual Risks? On the Value of Catastrophic Climate Change (2014)
Working Paper: Models-as-Usual for Unusual Risks? On the Value of Catastrophic Climate Change (2014)
Working Paper: Models-as-Usual for Unusual Risks? On the Value of Catastrophic Climate Change (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeeman:v:74:y:2015:i:c:p:1-22

DOI: 10.1016/j.jeem.2015.07.003

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