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Toward Impact Functions For Stochastic Climate Change

Author

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  • FRANCISCO ESTRADA

    (Institute for Environmental Studies, Vrije Universiteit, Amsterdam, The Netherlands†Centro de Ciencias de la Atmósfera, Universidad Nacional Autónoma de México, Mexico)

  • RICHARD S. J. TOL

    (Institute for Environmental Studies, Vrije Universiteit, Amsterdam, The Netherlands†Centro de Ciencias de la Atmósfera, Universidad Nacional Autónoma de México, Mexico‡Department of Economics, University of Sussex, Falmer, United Kingdom§Department of Spatial Economics, Vrije Universiteit, Amsterdam, The Netherlands¶Tinbergen Institute, Amsterdam, The Netherlands∥CESifo, Munich, Germany)

Abstract

Most functions of economic impact assume that climate change is smooth. We here propose impact functions that have stochastic climate change as an input. These functions are identical in shape and have similar parameters as do deterministic impact functions. The mean stochastic impacts are thus similar to deterministic impacts. Welfare effects are larger, and the stochasticity premium is larger than the risk premium. Results suggest that stochasticity is more important for past impacts than for future impacts. This outcome is partly caused by an underestimation of natural variability in the 21st century climate projections.

Suggested Citation

  • Francisco Estrada & Richard S. J. Tol, 2015. "Toward Impact Functions For Stochastic Climate Change," Climate Change Economics (CCE), World Scientific Publishing Co. Pte. Ltd., vol. 6(04), pages 1-13, November.
    • Handle: RePEc:wsi:ccexxx:v:06:y:2015:i:04:n:s2010007815500153
    DOI: 10.1142/S2010007815500153
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    References listed on IDEAS

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    Cited by:

    1. David Anthoff & Francisco Estrada & Richard S. J. Tol, 2016. "Shutting Down the Thermohaline Circulation," American Economic Review, American Economic Association, vol. 106(5), pages 602-606, May.
    2. Richard S.J. Tol, 2020. "The Economic Impact of Weather and Climate," Video Library 2094, Department of Economics, University of Sussex Business School.
    3. Francisco Estrada & Richard S.J. Tol & Wouter Botzen, "undated". "Economic consequences of the spatial and temporal variability of climate change," Working Paper Series 0123, Department of Economics, University of Sussex Business School.
    4. David Anthoff & Francisco Estrada & Richard S. J. Tol, 2016. "Shutting Down the Thermohaline Circulation," American Economic Review, American Economic Association, vol. 106(5), pages 602-06, May.
    5. Francisco Estrada & Richard S J Tol & Wouter J W Botzen, 2017. "Global economic impacts of climate variability and change during the 20th century," PLOS ONE, Public Library of Science, vol. 12(2), pages 1-16, February.

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    More about this item

    Keywords

    Economic impact of climate change; stochasticity; risk premium;
    All these keywords.

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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