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

Antoine Bommier (), Bruno Lanz and Stéphane Zuber
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Antoine Bommier: Chair for Integrative Risk Management and Economics - ETH Zürich - Eidgenössische Technische Hochschule - Swiss Federal Institute of Technology [Zürich]

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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; Politique environnementale; changement climatique; risques catastrophiques; aversion pour le risque; escompte (search for similar items in EconPapers)
Date: 2014-03
New Economics Papers: this item is included in nep-env and nep-upt
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00973491v1
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Published in 2014

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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 (2013)
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