Uncertain Outcomes and Climate Change Policy
Robert S. Pindyck
Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)
August 6, 2009
MIT Sloan Research Paper No. 4742-09
Focusing on tail effects, 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 its level, so that warming has a permanent impact on future GDP. The fitted distributions for temperature change and economic impact generally yield values of w*(τ) below 2%, even for small values of τ, unless one assumes extreme parameter values and/or substantial shifts in the temperature distribution. These results are consistent with moderate abatement policies.
Number of Pages in PDF File: 38
Keywords: Environmental policy, climate change, global warming, uncertainty, catastrophic outcomes
JEL Classification: Q5, Q54, D81working papers series
Date posted: August 16, 2009
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