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Global Warming and Fat Tailed-uncertainty: Rethinking the Timing and Intensity of Climate Policy

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  • Chen, Yu-Fu
  • Funke, Michael

Abstract

The possibility of low-probability extreme natural events has reignited the debate over the optimal intensity and timing of climate policy. In this paper, we contribute to the literature by assessing the implications of low-probability extreme events on environmental policy in a continuous-time real options model with tail risk. In a nutshell, our results indicate the importance of tail risk and call for foresighted pre-emptive climate policies.

Suggested Citation

  • Chen, Yu-Fu & Funke, Michael, 2012. "Global Warming and Fat Tailed-uncertainty: Rethinking the Timing and Intensity of Climate Policy," SIRE Discussion Papers 2012-41, Scottish Institute for Research in Economics (SIRE).
    • Handle: RePEc:edn:sirdps:665
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    File URL: http://hdl.handle.net/10943/665
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    References listed on IDEAS

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    More about this item

    Keywords

    Climate Policy; Extreme Events; Real Options; Levy process;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • 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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