The bias of integrated assessment models that ignore climate catastrophes
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Climate scientists currently predict there is a small but real possibility that climate change will lead to civilization threatening catastrophic events. Martin Weitzman has used this evidence along with his controversial “Dismal Theorem” to argue that integrated assessment models of climate change cannot be used to determine an optimal price for carbon dioxide. In this paper, I provide additional support for Weitzman’s conclusions by running numerical simulations to estimate risk premiums toward climate catastrophes. Compared to the assumptions found in most integrated assessment models, I incorporate into the model a more realistic range of uncertainty for both climate catastrophes and societal risk aversion. The resulting range of risk premiums indicates that the conclusions drawn from integrated assessment models that do not incorporate the potential for climate catastrophes are too imprecise to support any particular policy recommendation. The analysis of this paper is more straightforward and less technical than Weitzman’s, and therefore the conclusions should be accessible to a wider audience.
KeywordsRisk Aversion Risk Premium Representative Agent Relative Risk Aversion Integrate Assessment Model
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