The Consequences of Uncertainty: Climate Sensitivity and Economic Sensitivity to the Climate

John Hassler (), Per Krusell and Conny Olovsson
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John Hassler: Institute for International Economic Studies, S-106 91 Stockholm, Sweden

Annual Review of Economics, 2018, vol. 10, issue 1, 189-205

Abstract: We construct an integrated assessment model with multiple energy sources—two fossil fuels and green energy—and use it to evaluate ranges of plausible estimates for the climate sensitivity, as well as for the sensitivity of the economy to climate change. Rather than focusing explicitly on uncertainty, we look at extreme scenarios defined by the upper and lower limits given in available studies in the literature. We compare optimal policy with laissez faire, and we point out the possible policy errors that could arise. By far the largest policy error arises when the climate policy is overly passive; overly zealous climate policy (i.e., a high carbon tax applied when climate change and its negative impacts on the economy are very limited) does not hurt the economy much as there is considerable substitutability between fossil and nonfossil energy sources.

Keywords: climate change; integrated assessment model; uncertainty (search for similar items in EconPapers)
JEL-codes: O44 Q54 (search for similar items in EconPapers)
Date: 2018
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Working Paper: The Consequences of Uncertainty: Climate Sensitivity and Economic Sensitivity to the Climate (2019)
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