Climate Change Uncertainty Spillover in the Macroeconomy

Michael Barnett, William Brock and Lars Hansen

No 29064, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The design and conduct of climate change policy necessarily confronts uncertainty along multiple fronts. We explore the consequences of ambiguity over various sources and configurations of models that impact how economic opportunities could be damaged in the future. We appeal to decision theory under risk, model ambiguity and misspecification concerns to provide an economically motivated approach to uncertainty quantification. We show how this approach reduces the many facets of uncertainty into a low dimensional characterization that depends on the uncertainty aversion of a decision-maker or fictitious social planner. In our computations, we take inventory of three alternative channels of uncertainty and provide a novel way to assess them. These include i) carbon dynamics that capture how carbon emissions impact atmospheric carbon in future time periods; ii) temperature dynamics that depict how atmospheric carbon alters temperature in future time periods; iii) damage functions that quantify how temperature changes diminish economic opportunities. We appeal to geoscientific modeling to quantify the first two channels. We show how these uncertainty sources interact for a social planner looking to design a prudent approach to the social pricing of carbon emissions.

JEL-codes: D81 E61 G12 G18 Q51 Q54 (search for similar items in EconPapers)
Date: 2021-07
New Economics Papers: this item is included in nep-agr, nep-ene, nep-env, nep-isf and nep-mac
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Published as Climate Change Uncertainty Spillover in the Macroeconomy , Michael Barnett, William Brock, Lars Peter Hansen. in NBER Macroeconomics Annual 2021, volume 36 , Eichenbaum and Hurst. 2022

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Related works:
Journal Article: Climate Change Uncertainty Spillover in the Macroeconomy (2022)
Chapter: Climate Change Uncertainty Spillover in the Macroeconomy (2021)
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