Global Warming and Extreme Events: Rethinking the Timing and Intensity of Environmental Policy

Abstract

The possibility of low-probability extreme events has reignited the debate over the optimal intensity and timing of climate policy. In this paper we therefore contribute to the literature by assessing the implications of low-probability extreme events on environmental policy in a continuous-time real options model with “tail risk”. In a nutshell, our results indicate the importance of tail risk and call for foresighted pre-emptive climate policies.

Keywords: climate policy, extreme events, real options, Levy process

JEL Classification: D81, Q54, Q58