Escaping Damocles' Sword
- Author(s)
- Alexandra Brausmann, Lucas Bretschger
- Abstract
We consider a growing economy which is subject to recurring, random,
uninsurable, and potentially large and long-lasting climate shocks
leading to destruction of infrastructure, land degradation, collapse of
ecosystems or similar loss of productive capacity. The associated
damages and the hazard rate are endogenously driven by the stock of
greenhouse gases. We highlight the important role of the relative risk
aversion and provide analytical solutions for the optimal climate
policy, the growth rate and the saving propensity of the economy. We
stress the importance of jointly determining these variables, especially
if the objective is to formulate meaningful policy prescriptions. If,
for example, the growth rate or the saving rate are assumed to be
exogenous, and thus independent of the characteristics of climate shocks
and economic fundamentals, then future economic developments in the
face of climate change and, consequently, the future mitigation efforts
will deviate from the optimal paths. In a quantitative assessment we
show that with log-utility and under favorable technological and
climatic conditions the abatement expenditure represents only 0.5% of
output, equivalent to $37 per ton carbon. Under less favorable
conditions, coupled with a relative risk aversion which exceeds unity,
the abatement propensity increases to 2.9%, equivalent to $212 per ton
carbon, and it jumps to a striking 16% in the pessimistic scenario
involving severe shocks and low efficiency of abatement technology.
- Organisation(s)
- Department of Economics
- External organisation(s)
- Eidgenössische Technische Hochschule Zürich
- Journal
- Environmental and Resource Economics
- No. of pages
- 48
- ISSN
- 0924-6460
- DOI
- https://doi.org/10.1007/s10640-023-00835-w
- Publication date
- 01-2024
- Peer reviewed
- Yes
- Austrian Fields of Science 2012
- 502042 Environmental economics
- Keywords
- ASJC Scopus subject areas
- Economics and Econometrics, Management, Monitoring, Policy and Law
- Sustainable Development Goals
- SDG 15 - Life on Land, SDG 13 - Climate Action
- Portal url
- https://ucris.univie.ac.at/portal/en/publications/escaping-damocles-sword(4b88cfe7-689e-4b7f-827b-ac74ad7b8d2c).html