Models-as-Usual for Unusual Risks? On the Value of Catastrophic Climate Change

Antoine Bommier, Bruno Lanz and Stéphane Zuber

No 21-2013, CIES Research Paper series from Centre for International Environmental Studies, The Graduate Institute

Abstract: We study the role of alternative intertemporal preference representations in a model of economic growth, stock pollutant and endogenous risk of catastrophic collapse. We contrast the traditional “discounted utility” model, which assumes risk neutrality with respect to intertemporal utility, with a multiplicative choice model that displays risk aversion in that dimension. First, we show that both representations of preferences can rationalize the same “business as usual” economy for a given interest rate and no pollution externality. Second, once we introduce a collapse risk whose hazard rate is a function of the pollution stock, multiplicative preferences recommend a much more stringent policy response. An illustration in the context of climate change indicates that switching to the multiplicative preference representation has a similar effect, in terms of policy recommendations, as scaling up the schedule of the hazard rate by a factor of 100.

Keywords: Environmental policy; Climate change; Catastrophic risks; Risk aversion; Discounting. (search for similar items in EconPapers)
JEL-codes: D63 D81 D99 Q53 Q54 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2013-11-01
New Economics Papers: this item is included in nep-ene, nep-env and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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http://repec.graduateinstitute.ch/pdfs/ciesrp/CIES_RP_21.pdf (application/pdf)

Related works:
Journal Article: Models-as-usual for unusual risks? On the value of catastrophic climate change (2015)
Working Paper: Models-as-usual for unusual risks? On the value of catastrophic climate change (2015)
Working Paper: Models-as-usual for unusual risks? On the value of catastrophic climate change (2015)
Working Paper: Models-as-usual for unusual risks? On the value of catastrophic climate change (2015)
Working Paper: Models-as-Usual for Unusual Risks? On the Value of Catastrophic Climate Change (2014)
Working Paper: Models-as-Usual for Unusual Risks? On the Value of Catastrophic Climate Change (2014)
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