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The importance of ‘extremely unlikely’ events: tail risk and the costs of climate change

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  • John Quiggin

Abstract

In assessing the risks associated with climate change, ‘tail risks’ (low†probability extreme events) often play a much larger role than their probability alone might indicate. There are three main reasons for this: the linear relationship between sensitivity and warming; the convexity of the damage function; and the concavity of the utility function. Ignoring the upper tail of the distribution of possible outcomes will result in serious underestimates of the social cost of carbon dioxide (CO2) emissions and of the socially optimal price for emissions.

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  • John Quiggin, 2018. "The importance of ‘extremely unlikely’ events: tail risk and the costs of climate change," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 62(1), pages 4-20, January.
    • Handle: RePEc:bla:ajarec:v:62:y:2018:i:1:p:4-20
    DOI: 10.1111/1467-8489.12238
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    Cited by:

    1. Richard S.J. Tol, 2021. "Estimates of the social cost of carbon have not changed over time," Working Paper Series 0821, Department of Economics, University of Sussex Business School.
    2. Richard S. J. Tol, 2021. "Estimates of the social cost of carbon have increased over time," Papers 2105.03656, arXiv.org, revised Aug 2022.

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