Climate Policy Under Uncertain and Heterogeneous Climate Damages

Environmental and Resource Economics volume 54, pages 79–99 (2013)Cite this article

Abstract

We highlight that uncertainty about climate damages and the fact that damages will be distributed heterogeneously across the global population can jointly be an argument for substantially stricter climate policy even if uncertainty and heterogeneity in isolation are not. The reason is that a given climate risk borne by fewer people implies greater welfare losses. However, these losses turn out to be significant only if society is both risk and inequality averse and if climate damages are highly heterogeneous. We discuss how insurance and self-insurance of climate risk could theoretically mitigate this joint effect of uncertainty and heterogeneity and thus admit weaker climate policy. Insurance provides more efficient risk sharing and self-insurance allows strongly impacted individuals to compensate damages by increasing savings. We first use a simple analytical model to introduce the different concepts and then provide more realistic results from the integrated assessment model DICE.

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Author information

Affiliations

  1. Potsdam Institute for Climate Impact Research, Telegraphenberg A31, 14473, Potsdam, Germany

    Matthias G. W. Schmidt, Hermann Held & Elmar Kriegler

  2. University of Hamburg—Klima Campus, Bundesstr. 55, 20146, Hamburg, Germany

    Hermann Held

  3. Environmental Change Institute, University of Oxford, South Parks Road, Oxford, OX1 3QY, UK

    Alexander Lorenz

Authors
  1. Matthias G. W. Schmidt
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  2. Hermann Held
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  3. Elmar Kriegler
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  4. Alexander Lorenz
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Correspondence to Matthias G. W. Schmidt.

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Schmidt, M.G.W., Held, H., Kriegler, E. et al. Climate Policy Under Uncertain and Heterogeneous Climate Damages. Environ Resource Econ 54, 79–99 (2013). https://doi.org/10.1007/s10640-012-9582-2

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Keywords

  • Climate change
  • Climate policy
  • Stabilization target
  • Uncertainty
  • Heterogeneity
  • Damages
  • Insurance