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Climate change policy in a growing economy under catastrophic risks

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  • Tsur, Yacov
  • Zemel, Amos

Abstract

Under risk of catastrophic climate change, the occurrence hazard is added to the social discount rate. As a result, the social discount rate (i) increases and (ii) turns endogenous to the global warming policy. The second effect bears profound policy implications that are magnifed by economic growth. In particular, it implies that green- house gases (GHG) emission should gradually be brought to a halt. Due to the public bad nature of the catastrophic risk, the second effect is ignored in a competitive allocation and unregulated economic growth will give rise to excessive emissions. We find that the GHG emission paths under the optimal and competitive growth regimes lie at the extreme ends of the range of feasible emissions. We derive the Pigouvian hazard tax that implements the optimal growth regime.

Suggested Citation

  • Tsur, Yacov & Zemel, Amos, 2007. "Climate change policy in a growing economy under catastrophic risks," Discussion Papers 7132, Hebrew University of Jerusalem, Department of Agricultural Economics and Management.
    • Handle: RePEc:ags:huaedp:7132
    DOI: 10.22004/ag.econ.7132
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    References listed on IDEAS

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    1. Stern,Nicholas, 2007. "The Economics of Climate Change," Cambridge Books, Cambridge University Press, number 9780521700801.
    2. Arrow, Kenneth & Bolin, Bert & Costanza, Robert & Dasgupta, Partha & Folke, Carl & Holling, C.S. & Jansson, Bengt-Owe & Levin, Simon & Mäler, Karl-Göran & Perrings, Charles & Pimentel, David, 1996. "Economic growth, carrying capacity, and the environment," Environment and Development Economics, Cambridge University Press, vol. 1(1), pages 104-110, February.
    3. William D. Nordhaus, 2007. "A Review of the Stern Review on the Economics of Climate Change," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 686-702, September.
    4. Costanza, Robert, 1995. "Economic growth, carrying capacity, and the environment," Ecological Economics, Elsevier, vol. 15(2), pages 89-90, November.
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