The Consequences of Uncertainty: Climate Sensitivity and Economic Sensitivity to the Climate

Posted: 7 Sep 2018

See all articles by John Hassler

John Hassler

Stockholm University - Institute for International Economic Studies (IIES); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Conny Olovsson

Sveriges Riksbank

Per Krusell

Princeton University - Department of Economics; Stockholm University - Institute for International Economic Studies (IIES); Centre for Economic Policy Research (CEPR)

Date Written: August 2018

Abstract

We construct an integrated assessment model with multiple energy sources—two fossil fuels and green energy—and use it to evaluate ranges of plausible estimates for the climate sensitivity, as well as for the sensitivity of the economy to climate change. Rather than focusing explicitly on uncertainty, we look at extreme scenarios defined by the upper and lower limits given in available studies in the literature. We compare optimal policy with laissez faire, and we point out the possible policy errors that could arise. By far the largest policy error arises when the climate policy is overly passive; overly zealous climate policy (i.e., a high carbon tax applied when climate change and its negative impacts on the economy are very limited) does not hurt the economy much as there is considerable substitutability between fossil and nonfossil energy sources.

Suggested Citation

Hassler, John and Olovsson, Conny and Krusell, Per L., The Consequences of Uncertainty: Climate Sensitivity and Economic Sensitivity to the Climate (August 2018). Annual Review of Economics, Vol. 10, pp. 189-205, 2018. Available at SSRN: https://ssrn.com/abstract=3245101 or http://dx.doi.org/10.1146/annurev-economics-080217-053229

John Hassler

Stockholm University - Institute for International Economic Studies (IIES) ( email )

Stockholm, SE-10691
Sweden
+46 816 2070 (Phone)
+46 816 1443 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Conny Olovsson (Contact Author)

Sveriges Riksbank ( email )

Brunkebergstorg 11
SE-103 37 Stockholm
Sweden

Per L. Krusell

Princeton University - Department of Economics ( email )

111 Fisher Hall
Princeton, NJ
United States
609-258-4003 (Phone)
609-258-6419 (Fax)

HOME PAGE: http://rincewind.iies.su.se/%7Ekrusell/

Stockholm University - Institute for International Economic Studies (IIES) ( email )

Stockholm, SE-10691
Sweden
+46 0 8 16 30 73 (Phone)
+46 0 8 16 41 77 (Fax)

HOME PAGE: http://rincewind.iies.su.se/%7Ekrusell/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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