NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Fat Tails, Thin Tails, and Climate Change Policy

Robert S. Pindyck

NBER Working Paper No. 16353
Issued in September 2010
NBER Program(s):   EEE   IO   PE

Climate policy is complicated by the considerable compounded uncertainties over the costs and benefits of abatement. We don't even know the probability distributions for future temperatures and impacts, making cost-benefit analysis based on expected values challenging to say the least. There are good reasons to think that those probability distributions are fat-tailed, which implies that if social welfare is based on the expectation of a CRRA utility function, we should be willing to sacrifice close to 100% of GDP to reduce GHG emissions. I argue that unbounded marginal utility makes little sense, and once we put a bound on marginal utility, this implication of fat tails goes away: Expected marginal utility will be finite even if the distribution for outcomes is fat-tailed. Furthermore, depending on the bound on marginal utility, the index of risk aversion, and the damage function, a thin-tailed distribution can yield a higher expected marginal utility (and thus a greater willingness to pay for abatement) than a fat-tailed one.

download in pdf format
   (594 K)

email paper

This paper is available as PDF (594 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w16353

Published: Robert S. Pindyck, 2011. "Fat Tails, Thin Tails, and Climate Change Policy," Review of Environmental Economics and Policy, Oxford University Press for Association of Environmental and Resource Economists, vol. 5(2), pages 258-274, Summer. citation courtesy of

Users who downloaded this paper also downloaded these:
Pindyck w15692 Modeling the Impact of Warming in Climate Change Economics
Pindyck w15259 Uncertain Outcomes and Climate Change Policy
Weitzman w16136 GHG Targets as Insurance Against Catastrophic Climate Damages
Goulder and Pizer w11923 The Economics of Climate Change
Pindyck and Wang w15373 The Economic and Policy Consequences of Catastrophes
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us