Escaping Damocles' Sword

Alexandra Brausmann, Lucas Bretschger

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.

Department of Economics
External organisation(s)
Eidgenössische Technische Hochschule Zürich
Environmental and Resource Economics
No. of pages
Publication date
Peer reviewed
Austrian Fields of Science 2012
502042 Environmental economics
ASJC Scopus subject areas
Economics and Econometrics, Management, Monitoring, Policy and Law
Sustainable Development Goals
SDG 15 - Life on Land, SDG 13 - Climate Action
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