The importance of ‘extremely unlikely’ events: tail risk and the costs of climate change

John Quiggin

Australian Journal of Agricultural and Resource Economics, 2018, vol. 62, issue 1, 4-20

Abstract: In assessing the risks associated with climate change, ‘tail risks’ (low†probability extreme events) often play a much larger role than their probability alone might indicate. There are three main reasons for this: the linear relationship between sensitivity and warming; the convexity of the damage function; and the concavity of the utility function. Ignoring the upper tail of the distribution of possible outcomes will result in serious underestimates of the social cost of carbon dioxide (CO2) emissions and of the socially optimal price for emissions.

Date: 2018
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