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  3. American Economic Review
  4. May 2014
  5. Fat Tails and the Social Cost of Carbon

Fat Tails and the Social Cost of Carbon

  • Martin L. Weitzman
American Economic Review
vol. 104, no. 5, May 2014
(pp. 544-46)
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Abstract

At high enough greenhouse gas concentrations, climate change might conceivably cause catastrophic damages with small but non-negligible probabilities. If the bad tail of climate damages is sufficiently fat, and if the coefficient of relative risk aversion is greater than one, the catastrophe-reducing insurance aspect of mitigation investments could in theory have a strong influence on raising the social cost of carbon. In this paper I exposit the influence of fat tails on climate change economics in a simple stark formulation focused on the social cost of carbon. I then attempt to place the basic underlying issues within a balanced perspective.

Citation

Weitzman, Martin L. 2014. "Fat Tails and the Social Cost of Carbon." American Economic Review, 104 (5): 544-46. DOI: 10.1257/aer.104.5.544

Additional Materials

JEL Classification

  • H43 Project Evaluation; Social Discount Rate
  • Q51 Valuation of Environmental Effects
  • Q54 Climate; Natural Disasters; Global Warming
  • Q58 Environmental Economics: Government Policy