September 21, 2010

GHG Targets as Insurance Against Catastrophic Climate Damages

by Martin L. Weitzman

- A critical issue in climate-change economics is the specification of the so-called "damages function" and its interaction with the unknown uncertainty of catastrophic outcomes. This paper asks how much we might be misled by our economic assessment of climate change when we employ a conventional quadratic damages function and/or a thin-tailed probability distribution for extreme temperatures. The paper gives some numerical examples of the indirect value of various GHG concentration targets as insurance against catastrophic climate-change temperatures and damages. These numerical examples suggest that we might be underestimating considerably the welfare losses from uncertainty by using a quadratic damages function and/or a thin-tailed temperature distribution.

Martin L. Weitzman (2010). "GHG Targets as Insurance Against Catastrophic Climate Damages." NBER Working Paper No. 16136, Jun 2010.