The standard approach to the economics of climate change, which has its best known implementation in Nordhaus’s DICE and RICE models (well described in Nordhaus’s 2008 book, A Question of Balance]) is not well equipped to deal with the possibility of catastrophe, since we are unable to evaluate a risk averse representative agent’s expected utility when there is any significant probability of zero consumption. Whilst other authors attempt to develop new tools with which to address these problems, the simple solution proposed in this paper is to ask a question that the currently available tools of climate change economics are capable of answering. Rather than having agents optimally choosing a path (that differs from the recommendations of climate scientists) within models which cannot capture the essential features of the problem, I argue that economic models should be used to determine the savings and investment paths which implement climate targets that have been suggested in the physical science literature.
|Number of pages||24|
|Publication status||E-pub ahead of print - 6 Jan 2013|
|Name||SIRE DISCUSSION PAPER|
|Publisher||Scottish Institute for Research in Economics|
- climate change
- optimal policy
- alternative energy investment