Climate Change Uncertainty Spillover in the Macroeconomy

67 Pages Posted: 30 Jul 2021 Last revised: 3 Sep 2021

See all articles by Michael Barnett

Michael Barnett

Arizona State University (ASU) - Finance Department

William A. Brock

University of Wisconsin, Madison - Department of Economics; University of Missouri at Columbia - Department of Economics

Lars Peter Hansen

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: August 23, 2021

Abstract

The design and conduct of climate change policy necessarily confronts uncertainty along multiple fronts. We explore the consequences of ambiguity over various sources and configurations of models that impact how economic opportunities could be damaged in the future. We appeal to decision theory under risk, model ambiguity and misspecification concerns to provide an economically motivated approach to uncertainty quantification. We show how this approach reduces the many facets of uncertainty into a low dimensional characterization that depends on the uncertainty aversion of a decision-maker or fictitious social planner. In our computations, we take inventory of three alternative channels of uncertainty and provide a novel way to assess them. These include i) carbon dynamics that capture how carbon emissions impact atmospheric carbon in future time periods; ii) temperature dynamics that depict how atmospheric carbon alters temperature in future time periods; iii) damage functions that quantify how temperature changes diminish economic opportunities. We appeal to geoscientific modeling to quantify the first two channels. We show how these uncertainty sources interact for a social planner looking to design a prudent approach to the social pricing of carbon emissions.

JEL Classification: D81,E61,G12,G18,Q51,Q54

Suggested Citation

Barnett, Michael and Brock, William A. and Hansen, Lars Peter, Climate Change Uncertainty Spillover in the Macroeconomy (August 23, 2021). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2021-90, Available at SSRN: https://ssrn.com/abstract=3894705 or http://dx.doi.org/10.2139/ssrn.3894705

Michael Barnett

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

William A. Brock

University of Wisconsin, Madison - Department of Economics ( email )

1180 Observatory Drive
Madison, WI 53706
United States
608-263-6655 (Phone)
608-263-3876 (Fax)

University of Missouri at Columbia - Department of Economics ( email )

118 Professional Building
Columbia, MO 65211
United States

Lars Peter Hansen (Contact Author)

University of Chicago - Department of Economics ( email )

1101 E 58th ST
Chicago, IL 60637
United States
773-702-8170 (Phone)
773-702-8490 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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