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Climate Policy Under Fat-Tailed Risk: An Application of Dice

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Author: Hwang, I.C. · Reynès, F. · Tol, R.S.J.
Type:article
Date:2013
Source:Environmental and Resource Economics, 3, 56, 415-436
Identifier: 484278
doi: doi:10.1007/s10640-013-9654-y
Keywords: Environment · Climate change · Decision making under uncertainty · Fat-tailed risk · Integrated assessment · Carbon taxes · Climate policy · Climate sensitivity · Decision making under uncertainty · Deep uncertainties · Integrated assessment · Optimization · Climate change · climate change · decision making · environmental policy · pollution tax · risk assessment · Urban Development · Built Environment · Society · SP1 - Strategy & Policy 1 · BSS - Behavioural and Societal Sciences

Abstract

Uncertainty plays a significant role in evaluating climate policy, and fat-tailed uncertainty may dominate policy advice. Should we make our utmost effort to prevent the arbitrarily large impacts of climate change under deep uncertainty? In order to answer to this question, we propose a new way of investigating the impact of (fat-tailed) uncertainty on optimal climate policy: the curvature of the optimal carbon tax against the uncertainty. We find that the optimal carbon tax increases as the uncertainty about climate sensitivity increases, but it does not accelerate as implied by Weitzman's Dismal Theorem. We find the same result in a wide variety of sensitivity analyses. These results emphasize the importance of balancing the costs of climate change against its benefits, also under deep uncertainty. © 2013 Springer Science+Business Media Dordrecht.