High Impact, Low Probability: An Empirical Analysis of Risk in the Economics of Climate Change

Climatic Change, Vol. 103, No. 3, pp. 519-541, 2011

34 Pages Posted: 22 Jul 2009 Last revised: 11 Jul 2012

See all articles by Simon Dietz

Simon Dietz

London School of Economics - Grantham Research Institute on Climate Change and the Environment and Department of Geography and Environment

Date Written: 2011

Abstract

To what extent does economic analysis of climate change depend on low-probability, high-impact events' This question has received a great deal of attention lately, with the contention increasingly made that climate damage could be so large that societal willingness to pay to avoid extreme outcomes should overwhelm other seemingly important assumptions, notably on time preference. This paper provides an empirical examination of some key theoretical points, using a probabilistic integrated assessment model. New, fat-tailed distributions are inputted for key parameters representing climate sensitivity and economic costs. It is found that welfare estimates do strongly depend on tail risks, but for a set of plausible assumptions time preference can still matter.

Keywords: Catastrophe, climate change, cost-benefit analysis, discount rate, integrated assessment, risk, uncertainty

JEL Classification: Q54

Suggested Citation

Dietz, Simon, High Impact, Low Probability: An Empirical Analysis of Risk in the Economics of Climate Change (2011). Climatic Change, Vol. 103, No. 3, pp. 519-541, 2011, Available at SSRN: https://ssrn.com/abstract=1437089

Simon Dietz (Contact Author)

London School of Economics - Grantham Research Institute on Climate Change and the Environment and Department of Geography and Environment ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

HOME PAGE: http://personal.lse.ac.uk/dietzs