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
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)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:enepol:v:89:y:2016:i:c:p:25-35
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