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High impact, low probability? An empirical analysis of risk in the economics of climate change

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Abstract

To what extent does economic analysis of climate change depend on low-probability, high-impact events? This question has received a great deal of attention lately, with the contention increasingly made that climate damage could be so large that societal willingness to pay to avoid extreme outcomes should overwhelm other seemingly important assumptions, notably on time preference. This paper provides an empirical examination of some key theoretical points, using a probabilistic integrated assessment model. New, fat-tailed distributions are inputted for key parameters representing climate sensitivity and economic costs. It is found that welfare estimates do strongly depend on tail risks, but for a set of plausible assumptions time preference can still matter.

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Authors and Affiliations

  1. Grantham Research Institute on Climate Change and the Environment, and Department of Geography and Environment, London School of Economics and Political Science (LSE), Houghton Street, London, WC2A 2AE, UK

    Simon Dietz

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  1. Simon Dietz
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Correspondence to Simon Dietz.

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Dietz, S. High impact, low probability? An empirical analysis of risk in the economics of climate change. Climatic Change 108, 519–541 (2011). https://doi.org/10.1007/s10584-010-9993-4

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  • DOI: https://doi.org/10.1007/s10584-010-9993-4

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