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Fat Tails and the Social Cost of Carbon

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  • Martin L. Weitzman

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.

Suggested Citation

  • Martin L. Weitzman, 2014. "Fat Tails and the Social Cost of Carbon," American Economic Review, American Economic Association, vol. 104(5), pages 544-546, May.
    • Handle: RePEc:aea:aecrev:v:104:y:2014:i:5:p:544-46
    Note: DOI: 10.1257/aer.104.5.544
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    References listed on IDEAS

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    1. Robert S. Pindyck, 2013. "Climate Change Policy: What Do the Models Tell Us?," Journal of Economic Literature, American Economic Association, vol. 51(3), pages 860-872, September.
    2. Martin L. Weitzman, 2011. "Fat-Tailed Uncertainty in the Economics of Catastrophic Climate Change," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 5(2), pages 275-292, Summer.
    3. Simon Dietz, 2011. "High impact, low probability? An empirical analysis of risk in the economics of climate change," Climatic Change, Springer, vol. 108(3), pages 519-541, October.
    4. Robert J. Barro, 2015. "Environmental Protection, Rare Disasters and Discount Rates," Economica, London School of Economics and Political Science, vol. 82(325), pages 1-23, January.
    5. Antony Millner, 2013. "On Welfare Frameworks and Catastrophic Climate Risks," CESifo Working Paper Series 4442, CESifo.
    6. Millner, Antony, 2013. "On welfare frameworks and catastrophic climate risks," Journal of Environmental Economics and Management, Elsevier, vol. 65(2), pages 310-325.
    7. Dietz, Simon, 2011. "High impact, low probability?: an empirical analysis of risk in the economics of climate change," LSE Research Online Documents on Economics 38586, London School of Economics and Political Science, LSE Library.
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    More about this item

    JEL classification:

    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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