Risk aversion - a necessary condition for limiting global environmental risks?

Cornelia Ohl

No 190, HWWA Discussion Papers from Hamburg Institute of International Economics (HWWA)

Abstract: Standard risk economic analysis suggests that global environmental risk is lower in the case of risk aversion than in the case of risk neutrality or risk seeking. Maybe the reason why the Advisory Council of the German Government on Global Environmental Change (WBGU) explicitly recommends to behave as a risk averter when dealing with problems of global risk management. However risk aversion not always guaranties the limitation of a global pollutant, like CO2. To show this the paper focuses on two different landscapes of risk that are motivated by aspects of ecological vulnerability of the nations as well as the country-specific abilities to cope with environmental change. Each is defined in terms of the means – and of the standard deviation ó of the national welfare distributions in different states of emission behaviour. The nations under consideration are either risk neutral, risk averse or risk seeking and are sovereign in taking measures of global risk reduction. Following the assumption of expected utility maximisation it is revealed that taking and enforcing measures of risk reduction critically depend on the interplay of the subjective risk preferences and the landscape of risk induced by the effects of global risk control. Hence, given the national risk preferences, it is the landscape of risk that determines the co-operative power of national risk attitudes and with it attributes the nations as environmental-friendly or not.

Date: 2002
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