Optimal Climate Policy for a Pessimistic Social Planner

39 Pages Posted: 2 Feb 2014

See all articles by Edilio Valentini

Edilio Valentini

Universita D'Annunzio

Paolo Vitale

G. d'Annunzio University - Dipartimento di Economia

Multiple version iconThere are 2 versions of this paper

Date Written: February 1, 2014


In this paper we characterize the preferences of a pessimistic social planner concerned with the potential costs of extreme, low-probability climate events. This pessimistic attitude is represented by a recursive optimization criterion à la Hansen and Sargent (1995) that introduces supplementary curvature in the social preferences of standard linear-quadratic optimization analysis and, under certain conditions, it can be shown to correspond to the Epstein-Zin recursive utility. The introduction of extra convexity and the separation between risk-aversion and time-preference implies that, independently of the choice of the discount rate, a sharp, early and steady mitigation effort arises as the optimal climate policy, supporting the main recommendation of the Stern Review (Stern, 2007). Nonetheless, we accommodate for its main criticism of using a too low and questionable discount rate (Nordhaus, 2007), while preserving the assumption of a normal (thin-tailed) probability distribution (Weitzman, 2009). Finally, we argue that our theoretical framework is sufficiently general and robust to possible mis-specifications of the model.

Keywords: climate change, climate policy targets, risk aversion, pessimism

JEL Classification: C61, Q54

Suggested Citation

Valentini, Edilio and Vitale, Paolo, Optimal Climate Policy for a Pessimistic Social Planner (February 1, 2014). Available at SSRN: https://ssrn.com/abstract=2389318 or http://dx.doi.org/10.2139/ssrn.2389318

Edilio Valentini

Universita D'Annunzio ( email )

Dept. of Quantitative Methods & Economic Theory
I-65127 Pescara

Paolo Vitale (Contact Author)

G. d'Annunzio University - Dipartimento di Economia ( email )

I-65127 Pescara, Pescara
+39 085 453 7647 (Phone)
+39 085 453 7565 (Fax)

HOME PAGE: http://www.unich.it/~vitale/

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