What is the 'Damages Function' for Global Warming - and What Difference Might it Make?

By Martin Weitzman. 2010

182 citations recorded by the source corpus.

The existing literature on climate change offers little guidance on why one specification or another of a "damages function" has been selected. Ideally, one wants a functional form that captures reality adequately, yet is analytically sufficiently tractable to yield useful results. This paper gives two plausible risk aversion axioms that a reduced form utility function of temperature change and the capacity to produce consumption might reasonably be required to satisfy. These axioms indicate that the standard-practice multiplicative specification of disutility damages from global warming, as well as its additive analogue, are special cases of this paper's theoretically derived utility function. Empirically, the paper gives some numerical examples demonstrating the surprisingly strong implications for economic policy of the distinction between additive and multiplicative disutility damages.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/b48f0a8ec5f5b17eb000e2d4f674a5d7060d3902

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In Economics and Econometrics

Citations in the corpus

Upper limit for sea level projections by 2100 (2014, background): “Assessing how to deal with the impact and costs of sea level rise poses serious structural issues in economic cost-benefit analysis (Weitzman 2009), but widely used assumption is of a quadratic function for climate change impacts (Nordhaus 2008, Weitzman 2010).”
Optimal climate change mitigation under long-term growth uncertainty: Stochastic integrated assessment and analytic findings (2014, background): “Proportionality of damages to economic production is a ubiquitous assumption in integrated assessment models, but it recently received attention in critical discussions of integrated assessment models (Weitzman 2010).”
A multi-model assessment of regional climate disparities caused by solar geoengineering (2014, background): “A quadratic function for impacts of climate change (e.g., Nordhaus 2008) is widely used, although real damages are certainly not always quadratic, and assigning a single functional form to climate damages can be somewhat arbitrary (Weitzman 2010).”
Watch Your Step: Optimal Policy in a Tipping Climate (2014, background): “In purely theoretic work, Weitzman (2009, 2010) shows that uncertainty over the damage function can potentially change the optimal carbon tax by a similar magnitude.”
Pollution Control with Uncertain Stock Dynamics: When, and How, to be Precautious (2012, background): “However, in the case of environmental economics, its attractive qualities often come at a price, primarily due to two basic factors: (a) the high structural uncertainty over the physics of environmental phenomena which makes the assignment of precise probabilistic model structure untenable [35], and”
Growth Theory and "Green Growth" (2014, background): “…comes to the design of an optimal carbon tax, it is important to realize that the tax level as well as its time path may crucially depend of having damages incorporated in a multiplicative or an additive way in instantaneous welfare ( e.g. Weitzman 2010) or in technology (e.g., Rezai et al. 2013).”