Fat Tails and the Social Cost of Carbon
AbstractAt high enough greenhouse gas concentrations, climate change might conceivably cause catastrophic damages with small but non-negligible probabilities. If the bad tail of climate damages is sufficiently fat, and if the coefficient of relative risk aversion is greater than one, the catastrophe-reducing insurance aspect of mitigation investments could in theory have a strong influence on raising the social cost of carbon. In this paper I exposit the influence of fat tails on climate change economics in a simple stark formulation focused on the social cost of carbon. I then attempt to place the basic underlying issues within a balanced perspective.
CitationWeitzman, Martin L. 2014. "Fat Tails and the Social Cost of Carbon." American Economic Review, 104 (5): 544-46. DOI: 10.1257/aer.104.5.544
- H43 Project Evaluation; Social Discount Rate
- Q51 Valuation of Environmental Effects
- Q54 Climate; Natural Disasters; Global Warming
- Q58 Environmental Economics: Government Policy