Sunday, January 09, 2011

ON MODELING AND INTERPRETING THE ECONOMICS OF CATASTROPHIC CLIMATE CHANGE

The Author: Martin L. Weitzman (Department of Economics, Harvard University)
Abstract

With climate change as prototype example, this paper analyzes the implications of structural uncertainty for the economics of lowprobability, high-impact catastrophes. Even when updated by Bayesian learning, uncertain structural parameters induce a critical “tail fattening” of posterior-predictive distributions. Such fattened tails have strong implications for situations, like climate change, where a catastrophe is theoretically possible because prior knowledge cannot place sufficiently narrow bounds on overall damages. This paper shows that the economic consequences of fat-tailed structural uncertainty (along with unsureness about high-temperature damages) can readily outweigh the effects of discounting in climate-change policy analysis.

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