Climate Policy Under Fat-Tailed Risk: An Application of Dice
article
Uncertainty plays a significant role in evaluating climate policy, and fat-tailed uncertainty may dominate policy advice. Should we make our utmost effort to prevent the arbitrarily large impacts of climate change under deep uncertainty? In order to answer to this question, we propose a new way of investigating the impact of (fat-tailed) uncertainty on optimal climate policy: the curvature of the optimal carbon tax against the uncertainty. We find that the optimal carbon tax increases as the uncertainty about climate sensitivity increases, but it does not accelerate as implied by Weitzman's Dismal Theorem. We find the same result in a wide variety of sensitivity analyses. These results emphasize the importance of balancing the costs of climate change against its benefits, also under deep uncertainty. © 2013 Springer Science+Business Media Dordrecht.
Topics
Climate changeDecision making under uncertaintyFat-tailed riskIntegrated assessmentCarbon taxesClimate policyClimate sensitivityDecision making under uncertaintyDeep uncertaintiesIntegrated assessmentOptimizationClimate changeclimate changedecision makingenvironmental policypollution taxrisk assessment
TNO Identifier
484278
ISSN
09246460
Source
Environmental and Resource Economics, 56(3), pp. 415-436.
Pages
415-436
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