Fat Tails and the Social Cost of Carbon

Martin Weitzman

American Economic Review, 2014, vol. 104, issue 5, 544-46

Abstract: At high enough greenhouse gas concentrations, climate change might conceivably cause catastrophic damages with small but non-negligible probabilities. If the bad tail of climate damages is sufficiently fat, and if the coefficient of relative risk aversion is greater than one, the catastrophe-reducing insurance aspect of mitigation investments could in theory have a strong influence on raising the social cost of carbon. In this paper I exposit the influence of fat tails on climate change economics in a simple stark formulation focused on the social cost of carbon. I then attempt to place the basic underlying issues within a balanced perspective.

JEL-codes: H43 Q51 Q54 Q58 (search for similar items in EconPapers)
Date: 2014
Note: DOI: 10.1257/aer.104.5.544
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Citations: View citations in EconPapers (40)

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