Climate Change Catastrophes

William Pizer

RFF Working Paper Series from Resources for the Future

Abstract: Most studies that compare price and quantity controls for greenhouse gas emissions under uncertainty find that price mechanisms perform substantially better. In these studies, the benefits from reducing emissions are proportional to the level of reductions, and such linear benefits strongly favor price policies (Weitzman 1974). Catastrophic damages, however, challenge that intuition as consequences become highly nonlinear. Catastrophe avoidance offers huge benefits, and incremental adjustments on either side of the associated threshold are relatively unimportant, suggesting a strong preference for quantity controls. This paper shows that with catastrophic damages, both price and quantity mechanisms offer large gains over the business-as-usual alternative, and the difference between policies is never more than 10%. Catastrophe avoidance is much more important than efficient catastrophe avoidance. Although previous studies favoring price policies in the presence of uncertainty have worried that catastrophes would reverse their results, this analysis indicates that such concerns are not borne out.

Keywords: climate change; global warming; prices versus quantities; stock externalities; integrated assessment; uncertainty (search for similar items in EconPapers)
JEL-codes: C68 D81 Q28 (search for similar items in EconPapers)
Date: 2003-05-01
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 (9)

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Working Paper: Climate Change Catastrophes (2003)
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