Optimal climate policy under tipping risk and temporal risk aversion

Romain Fillon, Céline Guivarch and Nicolas Taconet

Journal of Environmental Economics and Management, 2023, vol. 121, issue C

Abstract: We investigate the implications of absolute risk aversion with respect to intertemporal utility, i.e. temporal risk aversion, in the presence of a stylized climate tipping risk affecting productivity irreversibly. Optimal climate policy is more stringent under temporal risk aversion, in order to reduce all present and future probabilities of crossing the tipping point and avoid a situation where all generations are badly off. Temporal risk aversion implies a 30% increase in the social cost of carbon (SCC) under our benchmark calibration and for a 10% irreversible increase in the level of economic damage from climate change. The optimal SCC under temporal risk aversion increases sharply with the level of damage brought by a potential tipping point.

Keywords: Stochastic climate-economy modeling; Risk-sensitive recursive preferences; Environmental policy; Risk aversion (search for similar items in EconPapers)
JEL-codes: D61 D63 D71 D81 Q54 Q58 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeeman:v:121:y:2023:i:c:s0095069623000682

DOI: 10.1016/j.jeem.2023.102850

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