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Uncertain Outcomes and Climate Change Policy

38 Pages Posted: 16 Aug 2009  

Robert S. Pindyck

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: August 6, 2009

Abstract

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.

Keywords: Environmental policy, climate change, global warming, uncertainty, catastrophic outcomes

JEL Classification: Q5, Q54, D81

Suggested Citation

Pindyck, Robert S., Uncertain Outcomes and Climate Change Policy (August 6, 2009). MIT Sloan Research Paper No. 4742-09. Available at SSRN: https://ssrn.com/abstract=1448683 or http://dx.doi.org/10.2139/ssrn.1448683

Robert Pindyck (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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