Climate Policy When the Distant Future Matters: Catastrophic Events with Hyperbolic Discounting

Larry S. Karp and Yacov Tsur
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Yacov Tsur: The Hebrew University of Jerusalem

No 1037, Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series from Department of Agricultural & Resource Economics, UC Berkeley

Abstract: Low probability catastrophic climate change can have a significant influence on policy under hyperbolic discounting. We compare the set of Markov Perfect Equilibria (MPE) to the optimal policy under time-consistent commitment. For some initial levels of risk there are multiple MPE; these may involve either excessive or insufficient stabilization effort. These results imply that even if the free-rider problem amongst contemporaneous decision-makers were solved, there may remain a coordination problem amongst successive generations of decision-makers. A numerical example shows that under plausible conditions society should respond vigorously to the threat of climate change.

Keywords: abrupt climate change; event uncertainty; catastrophic risk; hyperbolic discounting; Markov Perfect Equilibria (search for similar items in EconPapers)
Date: 2007-02-02
Note: oai:cdlib1:are_ucb-1138
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Working Paper: CLIMATE POLICY WHEN THE DISTANT FUTURE MATTERS: CATASTROPHIC EVENTS WITH HYPERBOLIC DISCOUNTING (2007)
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Persistent link: http://EconPapers.repec.org/RePEc:cdl:agrebk:1037

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