High impact, low probability? An empirical analysis of risk in the economics of climate change

Simon Dietz

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: To what extent does economic analysis of climate change depend on low-probability, high-impact events? This question has received a great deal of attention lately, with the contention increasingly made that climate damage could be so large that societal willingness to pay to avoid extreme outcomes should overwhelm other seemingly important assumptions, notably on time preference. This paper provides an empirical examination of some key theoretical points, using a probabilistic integrated assessment model. New, fat-tailed distributions are inputted for key parameters representing climate sensitivity and economic costs. It is found that welfare estimates do strongly depend on tail risks, but for a set of plausible assumptions time preference can still matter.

Keywords: catastrophe; climate change; cost-benefit analysis; discount rate; integrated assessment; risk; uncertainty (search for similar items in EconPapers)
JEL-codes: Q54 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2009-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:37612

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