Working Paper: NBER ID: w15259
Authors: Robert S. Pindyck
Abstract: Focusing on tail effects, I incorporate distributions for temperature change and its economic impact in an analysis of climate change policy. I estimate the fraction of consumption w*(tau) that society would be willing to sacrifice to ensure that any increase in temperature at a future point is limited to tau. Using information on the distributions for temperature change and economic impact from studies assembled by the IPCC and from "integrated assessment models" (IAMs), I fit displaced gamma distributions for these variables. Unlike existing IAMs, I model economic impact as a relationship between temperature change and the growth rate of GDP as opposed to its level, so that warming has a permanent impact on future GDP. The fitted distributions for temperature change and economic impact generally yield values of w*(tau) below 2%, even for small values of tau, unless one assumes extreme parameter values and/or substantial shifts in the temperature distribution. These results are consistent with moderate abatement policies.
Keywords: Climate Change; Economic Impact; Willingness to Pay
JEL Codes: D81; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in temperature (Q54) | decrease in GDP growth rate (E20) |
| temperature change (O30) | willingness to pay (WTP) (Q26) |
| GDP growth rate (O49) | willingness to pay (WTP) (Q26) |
| risk aversion (D81) | willingness to pay (WTP) (Q26) |
| growth rate (O40) | willingness to pay (WTP) (Q26) |
| temperature changes (Q54) | economic impacts (F69) |