Fat Tails, Thin Tails, and Climate Change Policy
By Robert S. Pindyck. Review of Environmental Economics and Policy, 2010
195 citations recorded by the source corpus.
Climate policy is complicated by the considerable uncertainties concerning the benefits and costs of abatement. We do not even know the probability distributions for future temperatures and impacts, making benefit–cost analysis based on expected values challenging to say the least. There are good reasons to believe that those probability distributions are fat-tailed, which implies that if social welfare is based on the expectation of a constant relative risk aversion utility function, then we should be willing to sacrifice close to 100 percent of gross domestic product to reduce greenhouse gas emissions. I argue that unbounded marginal utility makes little sense and that once we put a bound on marginal utility, this implication of fat tails goes away: Expected marginal utility will be finite even if the distribution for outcomes is fat-tailed. Furthermore, depending on the bound on marginal utility, the index of risk aversion, and the damage function, a thin-tailed distribution can actually yield a higher expected marginal utility (and thus a greater willingness to pay for abatement) than a fat-tailed one.
Subfields: Economics and Econometrics, Renewable Energy, Sustainability and the Environment
View Paper: https://www.semanticscholar.org/paper/80a679fc9ecdf675040c1d8b9f9600631fd9bf37
How researchers see this paper
The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.
In Economics and Econometrics
- Richard S. J. Tol
- William Nordhaus
- Babatunde O. Abidoye
- Ayodele Odusola
- Delavane Diaz
- David Anthoff
- Gary W. Yohe
- Partha Dasgupta
In Renewable Energy, Sustainability and the Environment
- Richard S. J. Tol
- William Nordhaus
- Babatunde O. Abidoye
- Ayodele Odusola
- Gary W. Yohe
- David Anthoff
- Partha Dasgupta
- Martin Weitzman
Citations in the corpus
- The Economics of Tail Events with an Application to Climate Change (2011, background): “2The other articles in this symposium are Weitzman (2011) and Pindyck (2011).”
- Climate Change and Economic Growth in Africa: An Econometric Analysis (2015, background): “Second, the resources required to counter the impact of warming would reduce investment in economic and physical infrastructures, research and development and human capital thereby reducing growth (Pindyck, 2011; Ali, 2012).”
- More than Mean Effects: Modeling the Effect of Climate on the Higher Order Moments of Crop Yields (2012, unknown): “Our application demonstrates this moment based maximum entropy approach’s ability to capture climate-driven changes in the “fatness” of the yield distribution’s tails, the importance of which was recently stressed in Nordhaus (2011), Pindyck (2011), and Weitzman (2011).”
- Targets for global climate policy: an overview (2013, background): “1, I1⁄4aTþbT(2) as proposed by Tol (2009), with I1⁄4aT(2)þbT (6), as proposed by Weitzman (2012). According to this, initial warming has hardly any impact, intermediate warming is beneficial, and large warming is disastrous.”