American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Fat Tails and the Social Cost of Carbon
American Economic Review
vol. 104,
no. 5, May 2014
(pp. 544–46)
Abstract
At high enough greenhouse gas concentrations, climate change might conceivably cause catastrophic damages with small but non-negligible probabilities. If the bad tail of climate damages is sufficiently fat, and if the coefficient of relative risk aversion is greater than one, the catastrophe-reducing insurance aspect of mitigation investments could in theory have a strong influence on raising the social cost of carbon. In this paper I exposit the influence of fat tails on climate change economics in a simple stark formulation focused on the social cost of carbon. I then attempt to place the basic underlying issues within a balanced perspective.Citation
Weitzman, Martin L. 2014. "Fat Tails and the Social Cost of Carbon." American Economic Review, 104 (5): 544–46. DOI: 10.1257/aer.104.5.544Additional Materials
JEL Classification
- H43 Project Evaluation; Social Discount Rate
- Q51 Valuation of Environmental Effects
- Q54 Climate; Natural Disasters; Global Warming
- Q58 Environmental Economics: Government Policy