Uncertainty, Extreme Outcomes and Climate Change: A Critique

Abstract

Building upon the work of Pindyck (2012), I show how different assumptions regarding the utility and damage functions can support the immediate adoption of a stringent abatement policy. I employ an additive rather than a multiplicative form for the utility function and a damage function that accounts for extreme climate change. Using the distribution for temperature change and the economic impact provided by Pindyck (2012), based on information from the IPCC (2007) and recent IAMs, I estimate a simple measure of "willingness to pay". My specifications lead to significantly higher estimations for the WTP than in Pindyck and in some extreme cases to a value close to 1. Although one could not strongly argue which is the right specification for the model, the analysis suggests that seemingly small differences in modelling can have very different policy implications.