On Modeling and Interpreting the Economics of Catastrophic Climate Change

Citation:

Weitzman M. On Modeling and Interpreting the Economics of Catastrophic Climate Change. Review of Economics and Statistics. 2009;91 (1) :1-19.

Abstract:

With climate change as prototype example, this paper analyzes the implications of structural uncertainty for the economics of low probability, high-impact catastrophes. Even when updated by Bayesian learning, uncertain structural parameters induce a critical “tail fattening” of posterior-predictive distributions. Such fattened tails have strong implications for situations, like climate change, where a catastrophe is theoretically possible because prior knowledge cannot place sufficiently narrow bounds on overall damages. This paper shows that the economic consequences of fat-tailed structural uncertainty (along with unsureness about high-temperature damages) can readily outweigh the effects of discounting in climate-change policy analysis.