DP11802 Comparing Alternative Policies Against Environmental Catastrophes

Author(s): Timothy J. Besley, Avinash K. Dixit
Publication Date: January 2017
Keyword(s): catastrophic risk, climate change
JEL(s): Q54, Q58
Programme Areas: Development Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11802

We construct a model with three features important in the context of major environmental catastrophes: (1) the distribution of possible damage has a fat tail, (2) the probability of the catastrophic event increases as greenhouse gases accumulate, (3) a technological solution may emerge making conservation efforts unnecessary. We solve the model numerically for plausible values of the parameters, and evaluate the tradeoffs between alternative policies such as prevention, mitigation, and technological fixes.