Optimal Climate Policy for a Pessimistic Social Planner

Edilio Valentini and Paolo Vitale

No 2014.33, Working Papers from Fondazione Eni Enrico Mattei

Abstract: In this paper we characterize the preferences of a pessimistic social planner concerned with the potential costs of extreme, low-probability climate events. This pessimistic attitude is represented by a recursive optimization criterion à la Hansen and Sargent (1995) that introduces supplementary curvature in the social preferences of standard linear-quadratic optimization analysis and, under certain conditions, it can be shown to correspond to the Epstein-Zin recursive utility. The introduction of extra convexity and the separation between risk-aversion and time-preference implies that, independently of the choice of the discount rate, a sharp, early and steady mitigation effort arises as the optimal climate policy, supporting the main recommendation of the Stern Review (Stern, 2007). Nonetheless, we accommodate for its main criticism of using a too low and questionable discount rate (Nordhaus, 2007), while preserving the assumption of a normal (thin-tailed) probability distribution (Weitzman, 2009). Finally, we argue that our theoretical framework is sufficiently general and robust to possible mis-specifications of the model.

Keywords: Climate Change; Climate Policy Targets; Risk Aversion; Pessimism (search for similar items in EconPapers)
JEL-codes: C61 Q54 (search for similar items in EconPapers)
Date: 2014-03
New Economics Papers: this item is included in nep-ene and nep-env
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Journal Article: Optimal Climate Policy for a Pessimistic Social Planner (2019)
Working Paper: Optimal Climate Policy for a Pessimistic Social Planner (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:fem:femwpa:2014.33

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