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Fat-tailed risk about climate change and climate policy

In Chang Hwang (), Richard Tol () and Marjan Hofkes ()

Energy Policy, 2016, vol. 89, issue C, 25-35

Abstract: This paper investigates the role of emissions control in welfare maximization under fat-tailed risk about climate change. We provide a classification of fat tails and discuss the effect of fat-tailed risk on climate policy. One of the main findings is that emissions control may prevent the “strong” tail-effect from arising, at least under some conditions such as bounded temperature increases, low risk aversion, low damage costs, and bounded utility function. More specifically, the fat-tailed risk with respect to a climate parameter does not necessarily lead to an unbounded carbon tax. In this case, the basic principle of cost-benefit analysis maintains its applicability.

Keywords: Climate policy; Fat-tailed risk; Tail-effect; Integrated assessment (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1016/j.enpol.2015.11.012

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