Fat-tailed uncertainty and the learning-effect

Hwang, In Chang (2014): Fat-tailed uncertainty and the learning-effect.

Abstract

One of the recent findings in the economics of climate change is that emissions control plays a significant role in the reduction of the tail-effect of fat-tailed uncertainty on welfare. The current paper gives another perspective: the learning-effect. The effect of emissions control on welfare is decomposed into the direct effect and the learning-effect. Although this has been known for thin-tailed uncertainty in the literature, this paper takes a different approach: the changes in temperature distributions under fat-tailed uncertainty and learning.

• Item Type: MPRA Paper
• Language: English
• Keywords: Climate policy; deep uncertainty; Dismal Theorem; tail-effect; learning-effect
• Subjects: Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q54 - Climate ; Natural Disasters and Their Management ; Global Warming

References

Bellman, R., Dreyfus, S.E., 1962. Applied dynamic programming. The RAND Corporations.

Cyert, R.M., DeGroot, M.H., 1974. Rational expectations and Bayesian analysis. The Journal of Political Economy 82, 521-536.

Gregory, J.M., Foster, P.M., 2008. Transient climate response estimated from radiative forcing and observed temperature change. Journal of Geophysical Research 113, D23105.

Horowitz, J., Lange, A., 2014. Cost-benefit analysis under uncertainty: A note on Weitzman’s dismal theorem. Energy Economics 42, 201-203.

Hwang, I.C., Reynès, F., Tol, R.S.J., 2013a. Climate policy under fat-tailed risk: An application of DICE. Environmental and Resource Economics 56(3), 415-436.

Hwang, I.C., Tol, R.S.J., Hofkes, M.W., 2013b. Tail effects and the role of emissions control. University of Sussex Working Paper Series No. 66-2013.

Hwang, I.C., Tol, R.S.J., Hofkes, M.W., 2013c. Active learning about climate change. University of Sussex Working Paper Series No. 65-2013.

Hwang, I.C., Tol, R.S.J., Hofkes, M.W., 2014. The effect of learning on climate policy under fat-tailed uncertainty. Unpublished manuscript. The earlier version was presented at the 20th EAERE Conference, June 2013, Toulouse, France.

Ingham, A., Ma, J., Ulph, A., 2007. Climate change, mitigation and adaptation with uncertainty and learning. Energy Policy 35, 5354-5369.

Karp, L., 2009. Sacrifice, discounting and climate policy: five questions. CESifo Working Paper No. 2761.

Kelly, D.L., Kolstad, C.D., 1999. Bayesian learning, growth, and pollution. Journal of Economic Dynamics and Control 23, 491-518.

Kolstad, C.D., 1996a. Learning and stock effects in environmental regulation: the case of greenhouse gas emissions. Journal of Environmental Economics and Management 31, 1-18.

Kolstad, C.D., 1996b. Fundamental irreversibilities in stock externalities. Journal of Public Economics 60, 221-233.

Leach, A.J., 2007. The climate change learning curve. Journal of Economic Dynamics and Control 31, 1728-1752.

Millner, A., 2013. On welfare frameworks and catastrophic climate risks. Journal of Environmental Economics and Management 65, 310-325.

Nordhaus, W.D., 2008. A question of balance: Weighing the options on global warming policies. New Haven and London: Yale University Press.

Pindyck, R.S., 2011. Fat tails, thin tails, and climate change policy. Review of Environmental Economics and Policy 5, 258-274.

Pindyck, R.S., 2012. Uncertain outcomes and climate change policy. Journal of Environmental Economics and Management 63, 289-303.

Roe, G.H., Baker, M.B., 2007. Why is climate sensitivity so unpredictable? Science 318, 629-632.

Ulph, A., Ulph, D., 1997. Global warming, irreversibility and learning. The Economic Journal 107, 636-650.

Webster, M., 2002. The curious role of learning in climate policy: Should we wait for more data? The Energy Journal 23(2), 97-119.

Weitzman, M.L., 2009. On modeling and interpreting the economics of catastrophic climate change. The Review of Economics and Statistics 91, 1-19.

Weitzman, M.L., 2012. GHG targets as insurance against catastrophic climate damages. Journal of Public Economic Theory 14(2), 221-244.

Weitzman, M.L., 2013. A Precautionary Tale of Uncertain Tail Fattening. Environmental and Resource Economics 55, 159-173.