Abstract
The paper investigates a climate-economy model with an iso-elastic welfare function in which one parameter γ measures relative risk-aversion and a distinct parameter ρ measures resistance to intertemporal substitution.We show both theoretically and numerically that climate policy responds differently to variations in the two parameters. In particular, we show that higher γ but lower ρ leads to increase emissions control. We also argue that climate-economy models based on intertemporal expected utility maximization, i.e. models where γ = ρ, may misinterpret the sensitivity of the climate policy to risk-aversion.
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Ha-Duong, M., Treich, N. Risk Aversion, Intergenerational Equity and Climate Change. Environmental and Resource Economics 28, 195–207 (2004). https://doi.org/10.1023/B:EARE.0000029915.04325.25
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DOI: https://doi.org/10.1023/B:EARE.0000029915.04325.25