Equilibrium climate sensitivity (ECS), the link between concentrations of greenhouse gases in the atmosphere and eventual global average tempera- tures, has been persistently and perhaps deeply uncertain. Its ‘likely’ range has been approximately between 1.5 and 4.5 degrees Centigrade for almost 40 years (Wagner and Weitzman, 2015). Moreover, Roe and Baker (2007), Weitzman (2009), and others have argued that its right-hand tail may be long, ‘fat’ even. Enter Cox et al. (2018), who use an ‘emergent constraint’ approach to characterize the probability distribution of ECS as having a cen- tral or best estimate of 2.8◦C with a 66% confidence interval of 2.2-3.4 ◦C. This implies, by their calculations, that the probability of ECS exceeding 4.5◦C is less than 1%. They characterize such kind of result as “renewing hope that we may yet be able to avoid global warming exceeding 2[◦C]”. We share the desire for less uncertainty around ECS (Weitzman, 2011; Wagner and Weitzman, 2015). However, we are afraid that the upper-tail emergent constraint on ECS islargely a function of the assumed normal error terms in the regression analysis. We do not attemptto evaluate Cox et al. (2018)’s physical modeling (aside from the normality assumption), leaving that task to physical scientists. We take Cox et al. (2018)’s 66% confidence interval as given and explore the implications of applying alternative probability distri- butions. We find, for example, that moving from a normal to a log-normal distribution, while giving identical probabilities for being in the 2.2-3.4◦C range, increases the probability of exceeding 4.5◦C by over five times. Using instead a fat-tailed Pareto distribution, an admittedly extreme case, increases the probability by over forty times. Keywords: climate change, climate sensitivity, fat tails
This paper argues that a uniform global tax-like price on carbon emissions, whose revenues each country retains, can provide a focal point for a reciprocal common climate commitment, whereas quantity targets, which do not nearly so readily present such a single focal point, tend to rely ultimately on individual quantity commitments. The paper postulates the conceptually useful allegory of a futuristic ‘World Climate Assembly’ (WCA) that votes for a single worldwide price on carbon emissions via the basic democratic principle of one person, one vote majority rule. A WCA-like uniform price-tax counters self-interest by incentivizing countries or agents to internalize the externality because each WCA agent's higher abatement cost from a higher emissions price is counterbalanced by that agent's extra benefit from inducing all other WCA agents to simultaneously lower their emissions in response to the higher price. The paper derives fresh insights and new simple formulae that relate each emitter's most-preferred world price of carbon to the world ‘social cost of carbon’ (SCC), and further relates the WCA-voted world price of carbon to the world SCC. Some implications are discussed. The overall methodology of the paper is a mixture of mostly classical with some behavioural economics.
This paper posits the conceptually useful allegory of a futuristic “World Climate Assembly” that votes on global carbon emissions via the basic principle of majority rule. Two variants are considered. One is to vote on a universal price (or tax) that is internationally harmonized, but the proceeds from which are domestically retained. The other is to vote on the overall quantity of total worldwide emissions, which are then distributed for free (via a pre-decided fractional subdivision formula) as individual allowance permits that are subsequently marketed in an international cap-and-trade system. The model of the paper suggests that the majority-voted price is likely to be less distortionary and easier to enact than the majority-voted total quantity of permits. Some possible implications for climate-change negotiations are noted.
It is not immediately clear how to discount distant-future events, like climate change, when the distant-future discount rate itself is uncertain. The so-called “Weitzman-Gollier puzzle” is the fact that two seemingly symmetric and equally plausible ways of dealing with uncertain future discount rates appear to give diametrically opposed results with the opposite policy implications. We explain how the “Weitzman-Gollier puzzle” is resolved. When agents optimize their consumption plans and probabilities are adjusted for risk, the two approaches are identical. What we would wish a reader to take away from this paper is the bottom-line message that the appropriate long run discount rate declines over time toward its lowest possible value.