Monday, September 19, 2011

Fat Tails and Climate Change

The new issue of the Review of Environmental Economics and Policy arrived today. It's chocked full of interesting and useful articles, prominently including a symposium on "Fat Tails and the Economics of Climate Change," with contributions from Marty Weitzman, William Nordhaus, and Robert Pindyck. The title refers to the "fat tails" of probability density functions of climate sensitivity models, in which low-probability, high-magnitude temperature changes reside. Because the probabilities are not trivially low, and the magnitude of harm, should they occur, would be potentially catastrophic, Marty has been advocating that society purchase "climate insurance" to protect against high-harm scenarios. In this piece, Marty ably defends his important insight that the uncertainties lingering in the fat tails should be driving current climate policy.

While still somewhat conservative in his approach to the incorporation of low-probability, high-magnitude catastrophes into  integrated assessment models of climate change, Professor Nordhaus seems to have come around (relative to earlier writings) to recognizing the significance of lingering and potentially dangerous uncertainties in our economic models. Pindyck, likewise, stresses the importance of extreme climate changes to climate policy design, while also pointing to the consequences of taking into account budget constraints and the potential for catastrophic social harms from sources other than climate change.

In addition to those three fine articles, the volume includes an interesting piece on long-run trends in energy prices, a cross-country comparison of water markets (with Gary Libecap among the co-authors), and a well done primer for economists and policy analysts on greenhouse gas regulation under the Clean Air Act.

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