Optimal climate policy under tipping risk and temporal risk aversion

Politique climatique optimale en cas de risque de basculement et d'aversion au risque temporel

Romain Fillon (), Céline Guivarch and Nicolas Taconet ()
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Romain Fillon: CIRED - Centre International de Recherche sur l'Environnement et le Développement - Cirad - Centre de Coopération Internationale en Recherche Agronomique pour le Développement - EHESS - École des hautes études en sciences sociales - AgroParisTech - ENPC - École nationale des ponts et chaussées - Université Paris-Saclay - CNRS - Centre National de la Recherche Scientifique, UMR PSAE - Paris-Saclay Applied Economics - AgroParisTech - Université Paris-Saclay - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement
Nicolas Taconet: CIRED - Centre International de Recherche sur l'Environnement et le Développement - Cirad - Centre de Coopération Internationale en Recherche Agronomique pour le Développement - EHESS - École des hautes études en sciences sociales - AgroParisTech - ENPC - École nationale des ponts et chaussées - Université Paris-Saclay - CNRS - Centre National de la Recherche Scientifique, TUB - Technical University of Berlin / Technische Universität Berlin, PIK - Potsdam Institute for Climate Impact Research

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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; Environmental Economics; Climate change (search for similar items in EconPapers)
Date: 2023-09
New Economics Papers: this item is included in nep-ene, nep-env, nep-res and nep-upt
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Published in Journal of Environmental Economics and Management, 2023, 121, pp.102850. ⟨10.1016/j.jeem.2023.102850⟩

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Journal Article: Optimal climate policy under tipping risk and temporal risk aversion (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04250702

DOI: 10.1016/j.jeem.2023.102850

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