Climate Policy Under Fat-Tailed Risk: An Application of Dice

In Chang Hwang, Frédéric Reynès () and Richard Tol

Environmental & Resource Economics, 2013, vol. 56, issue 3, 415-436

Abstract: Uncertainty plays a significant role in evaluating climate policy, and fat-tailed uncertainty may dominate policy advice. Should we make our utmost effort to prevent the arbitrarily large impacts of climate change under deep uncertainty? In order to answer to this question, we propose a new way of investigating the impact of (fat-tailed) uncertainty on optimal climate policy: the curvature of the optimal carbon tax against the uncertainty. We find that the optimal carbon tax increases as the uncertainty about climate sensitivity increases, but it does not accelerate as implied by Weitzman’s Dismal Theorem. We find the same result in a wide variety of sensitivity analyses. These results emphasize the importance of balancing the costs of climate change against its benefits, also under deep uncertainty. Copyright Springer Science+Business Media Dordrecht 2013

Keywords: Climate change; Decision making under uncertainty; Fat-tailed risk; Integrated assessment; Q54 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (31)

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Working Paper: Climate Policy Under Fat-Tailed Risk: An Application of Dice (2011)
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DOI: 10.1007/s10640-013-9654-y

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