Uncertainty , Extreme Outcomes , and Climate Change
نویسنده
چکیده
Focusing on tail effects — low probability but very adverse outcomes — I incorporate distributions for temperature change and its economic impact in an analysis of climate change policy. I estimate the fraction of consumption w(τ ) that society would be willing to sacrifice to ensure that any increase in temperature at a future point is limited to τ . Using information on the distributions for temperature change and economic impact from studies assembled by the IPCC and from “integrated assessment models” (IAMs), I fit displaced gamma distributions for these variables. Unlike existing IAMs, I model economic impact as a relationship between temperature change and the growth rate of GDP as opposed to the level of GDP. This allows warming to have a permanent impact on future GDP. I find that the fitted distributions for temperature change and economic impact yield values of w(τ ) above 2 or 3% for small values of τ only for extreme parameter values and/or substantial shifts in the temperature distribution — which does not support the immediate adoption of a stringent abatement policy. JEL Classification Numbers: Q5; Q54, D81
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