Fat-tailed risk about climate change and climate policy

Hwang, In Chang, Tol, Richard S J and Hofkes, Marjan W (2016) Fat-tailed risk about climate change and climate policy. Energy Policy, 89. pp. 25-35. ISSN 0301-4215

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Abstract

This paper investigates the role of emissions control in welfare maximization under fat-tailed risk about climate change. We provide a classification of fat tails and discuss the effect of fat-tailed risk on climate policy. One of the main findings is that emissions control may prevent the “strong” tail-effect from arising, at least under some conditions such as bounded temperature increases, low risk aversion, low damage costs, and bounded utility function. More specifically, the fat-tailed risk with respect to a climate parameter does not necessarily lead to an unbounded carbon tax. In this case, the basic principle of cost-benefit analysis maintains its applicability.

Item Type: Article
Schools and Departments: School of Business, Management and Economics > Economics
Subjects: G Geography. Anthropology. Recreation > GE Environmental Sciences
H Social Sciences > HB Economic theory. Demography
Depositing User: Richard Tol
Date Deposited: 07 Mar 2016 08:22
Last Modified: 07 Mar 2016 08:22
URI: http://sro.sussex.ac.uk/id/eprint/59855
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