Magazine article Regulation

Climate Change Economics

Magazine article Regulation

Climate Change Economics

Article excerpt

* "Fat Tails, Thin Tails, and Climate Change Policy? by Robert S. Pindyck. September 2010. NBER #16353.

The most interesting intellectual debate in the economics of climate change is taking place between William Nordhaus (Yale), Martin Weitzman (Harvard), and Robert Pindyck (MIT). It involves technical discussions about the characteristics of the probability distributions of future temperature outcomes and the damages caused by such temperatures. This arcane discussion allegedly provides a scientific answer to the question of how much we should be willing to spend now to avoid catastrophic damages in the future.

The normal method of climate policy uncertainty evaluation (exemplified by Nordhaus's work) is Monte Carlo simulation (repeated simulation of a model using random draws from the distribution of possible variable values) of integrated economic and climate models. In such simulations, the distribution of damages from global warming are assumed to be thin-tailed--that is, the costs of damages from extremely low-probability high-temperature warming declines to zero faster than exponentially. Under this assumption, the marginal benefit of avoiding very high future temperatures (which produce large damages and reduce future consumption by large amounts) is bounded, finite, and small.

In a series of papers, Weitzman asks what if the distribution of damages is fat-tailed? That is, what if the damages from high global warming temperatures decline to zero more slowly than exponentially? …

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