Fat-Tailed Uncertainty in the Economics of Catastrophic Climate Change

I believe that the most striking feature of the economics of climate change is that its extreme downside is nonnegligible. Deep structural uncertainty about the unknown unknowns of what might go very wrong is coupled with essentially unlimited downside liability on possible planetary damages. This is a recipe for producing what are called ‘‘fat tails’’ in the extremes of critical probability distributions. There is a race being run in the extreme tail between how rapidly probabilities are declining and how rapidly damages are increasing. Who wins this race, and by how much, depends on how fat (with probability mass) the extreme tails are. It is difficult to judge how fat the tail of catastrophic climate change might be because it represents events that are very far outside the realm of ordinary experience. In this article, which is part of a symposium on Fat Tails and the Economics of Climate Change, I address some criticisms that have been leveled at previous work of mine on fat tails and the so-called ‘‘dismal theorem.’’ At first, I was inclined to debate some of the critics and their criticisms more directly. But, on second thought, I found myself anxious not to be drawn into being too defensive and having the main focus be on technical details. Instead, I am more keen here to emphasize anew and in fresh language the substantive concepts that, I think, may be more obscured than enlightened by a debate centered on technicalities. I am far more committed to the simple basic ideas that underlie my approach to fat-tailed uncertainty and the economics of catastrophic climate change than I am to the particular