endogenous growth convexity of damage and climate risk how nordhaus framework supports deep cuts in carbon emissions to slow or not to slow nordhaus 1991 was the first economic appraisal of greenhouse gas emissions abatement and founded a large literature on a topic of worldwide importance we offer our assessment of the original article and trace its legacy in particular nordhaus s later series of dice models from this work many have drawn the conclusion that an efficient global emissions abatement policy comprises modest and modestly increasing controls we use dice itself to provide an initial illustration that if the analysis is extended to take more strongly into account three essential elements of the climate problem the endogeneity of growth the convexity of damage and climate risk optimal policy comprises strong controls

frontiers of climate change economics the economics of climate change is an active field of research the contributions to a special issue are put in context of the literature and it is suggested that second best issues such as carbon leakage and the green paradox need to be complemented with a political economy analysis of why certain instruments are politically infeasible and with intra and intergenerational analyses of the impact of climate policy a case is also made for more empirical work on the gradual and catastrophic damages of global warming

environmental protection rare disasters and discount rates the stern review s evaluation of environmental protection stresses low discount rates and uncertainty about environmental effects an appropriate model for analysing this uncertainty and the associated discount rates requires sufficient risk aversion and fat tailed uncertainty to account for the observed equity premium calibrations based on epstein zin preferences and existing analyses of rare macroeconomic disasters suggest that optimal environmental investment can be a significant share of gdp even with reasonable rates of time preference optimal environmental investment increases with risk aversion and the probability and typical size of environmental disasters but decreases with uncertainty about policy effectiveness

best policy response to environmental shocks applying a stochastic framework abstract the paper develops a general framework for the analysis of environmental shocks in growing economies endogenous capital investments allow identifying the dual role of capital as a buffer against shocks and a source of pollution we study the effects of recurring natural disasters on optimal growth and efficient environmental policies emissions may cause continuous fluctuations entail discrete and recurring jumps or trigger so called tipping points with large costs to the economy closed form solutions are provided for all the model variants we discuss possible applications in environmental economics and identify current research gaps

pricing carbon and adjusting capital to fend off climate catastrophes the optimal reaction to a potential productivity shock as a consequence of climate tipping is to substantially tax carbon in order to curb the risk of tipping but to adjust capital as well in order to smooth consumption when tipping occurs we also allow for conventional marginal climate damages and decompose the optimal carbon tax in two catastrophe components and the conventional component we distinguish constant and increasing marginal hazards moreover the productivity catastrophe is compared with recoverable catastrophes and with a shock to the climate sensitivity finally we allow for investments in adaptation capital as an alternative to counter the potential adverse effects of climate tipping quantitatively the results are investigated with a calibrated model for the world economy

new microfoundations for the aggregate matching function empirical studies of the aggregate labor market matching function have favored a cobb douglas functional form for which there are no microfoundations in the existing literature i present a new model for the matching process based on a telephone line poisson queuing process which unlike other microeconomic approaches can be integrated directly into standard theoretical search models this implies a ces matching function approximately cobb douglas when search costs are approximately linear the model allows empirical estimates of matching function parameters to be interpreted in terms of the costs and benefits of search

averting catastrophes the strange economics of scylla and charybdis faced with numerous potential catastrophes nuclear and bioterrorism mega viruses climate change and others which should society attempt to avert a policy to avert one catastrophe considered in isolation might be evaluated in cost benefit terms but because society faces multiple catastrophes simple cost benefit analysis fails even if the benefit of averting each one exceeds the cost we should not necessarily avert them all we explore the policy interdependence of catastrophic events and develop a rule for determining which catastrophes should be averted and which should not jel d61 q51 q54

climatic tipping points and optimal fossil fuel use the economics of climate change is characterized by many uncertainties regarding for instance climate dynamics economic damages and potentially irreversible climate catastrophes using an optimal growth model of a fossil fuel driven economy subject to climate externalities and potentially irreversible climatic regime shifts this paper contributes to the understanding of how the risk of such events impacts on optimal fossil fuel use carbon taxes and fossil fuel prices over time we show that in excess to an increase in the expected present value of marginal damages and an increase in the probability of triggering the event there also exists a third opposing effect this effect comes from the fall in value of remaining fossil fuel reserve which results from the potential regime shift which may or may not occur sometime in the future and implies that optimal fossil fuel policy shifts towards using more resources early on this effect is related to the idea of the green paradox we prove the existence of this effect and show under which circumstances it can become quantitatively important numerically the green paradox effect seems to be somewhat smaller than but comparable in size to the increase in expected marginal damages in general our findings highlight the importance of considering the supply side impacts on climate policy in response to catastrophic climate events

environmental policy public finance and the labour market in a second best world abstract environmental and tax policies and the optimal provision of clean and dirty public goods are analysed within the context of a second best framework of optimal taxation households consume both clean and dirty commodities degradation of the natural environment occurs due to the consumption of dirty private and public goods but can be offset when the government engages in abatement activities increased environmental concern implies a higher dirt tax a lower tax on labour less employment more public abatement and a cleaner environment if the elasticity of substitution between private consumption commodities and leisure is large and that between clean and dirty goods is small public consumption may expand while private consumption contracts otherwise public consumption falls

how important are uncertainty and dynamics for environmental and climate policy some analytics abstract we introduce ten papers on sustainable resource dynamics in addition we provide analytical results on the effect of stochastic damages on optimal economic growth the effects of habits and loss aversion on the cost benefit discount rate and the effect of a carbon budget and carbon capture and storage ccs on optimal investment in technical change

income mobility profiles abstract an income mobility profile is a graphical tool to portray income mobility and identify the association between individual movements and initial status which despite its importance when assessing the social relevance of mobility is often discounted by aggregate mobility indices

substitution between clean and dirty energy inputs a macroeconomic perspective in macroeconomic models the elasticity of substitution between clean and dirty energy inputs within the energy aggregate is a central parameter in assessing the necessary conditions for long run green growth using new sectoral data in a panel of 26 countries we formulate specifications of nested constant elasticity of substitution production functions that allow estimating this parameter for the first time we present evidence that it significantly exceeds unity a favorable condition for promoting green growth

mortgage debt consumption and illiquid housing markets in the great recession using a model with housing search endogenous credit constraints and mortgage default this paper accounts for the housing crash from 2006 to 2011 and its implications for aggregate and cross sectional consumption during the great recession left tail shocks to labor market uncertainty and tighter down payment requirements emerge as the key drivers an endogenous decline in housing liquidity amplifies the recession by increasing foreclosures contracting credit and depressing consumption balance sheets act as a transmission mechanism from housing to consumption that depends on gross portfolio positions and the leverage distribution low interest rate policies accelerate the recovery in housing and consumption

the agnostic s response to climate deniers price carbon with the election of president trump climate deniers feel emboldened and moved from the fringes to the centre of global policy making we study how an agnostic approach to policy based on pascal s wager and allowing for subjective prior probability beliefs about whether climate deniers are right prices carbon using the dice integrated assessment model we find that assigning a 10 chance of climate deniers being correct lowers the global price on carbon in 2020 only marginally from 21 to 19 per ton of carbon dioxide if policymakers apply nordhaus discounting and from 91 to 84 per ton of carbon dioxide if they apply stern discounting agnostics reflection of remaining scientific uncertainty leaves climate policy essentially unchanged the robustness of an ambitious climate policy also follows from using the max min or the min max regret principle letting the coefficient of relative ambiguity aversion vary from zero corresponding to expected utility analysis to infinity corresponding to the max min principle we show how policy makers deal with fundamental climate model uncertainty if they are prepared to assign prior probabilities to different views of the world being correct allowing for an ethical discount rate and a higher market discount rate and for a wide range of sensitivity exercises including damage uncertainty we show that pricing carbon is the robust response under rising climate scepticism

a cross national comparison of permanent inequality in the united states and germany traditional cross sectional measures find greater inequality in the united states than in industrialized western european countries but are unable to distinguish transitory from permanent inequality with longitudinal data we measure cross sectional inequality during the 1980s using the shorrocks measure of income stability to find the degree to which single period measures exaggerate permanent inequality surprisingly given the smaller social welfare system and the less restrictive labor markets in the united states we find that both single period inequality and the share of that inequality that persists over time are greater in the united states than in germany

abrupt positive feedback and the social cost of carbon optimal climate policy should act in a precautionary fashion to deal with tipping points that occur at some future random moment the optimal carbon tax should include an additional component on top of the conventional present discounted value of marginal global warming damages this component increases with the sensitivity of the hazard to temperature or the stock of atmospheric carbon if the hazard of a catastrophe is constant no correction is needed of the usual pigouvian tax the results are applied to a tipping point resulting from an abrupt and irreversible release of greenhouse gases from the ocean floors and surface of the earth which set in motion a positive feedback loop convex enough hazard functions cause overshooting of the carbon tax but a linear hazard function gives rise to undershooting a more convex hazard function and a high discount rate speed up adjustment

consumption pollution tradeoffs in an environment vulnerable to pollution related catastrophic collapse abstract this paper considers the consequences of an avoidable risk of irreversible environmental catastrophe for society s optimal long run consumption pollution tradeoffs the risk is assumed to be a nondecreasing function of pollution concentration which evolves as a dynamic environmental renewal process the main objective of the paper is to derive qualitative insights regarding the effects of such risk on optimal management

climate policies under climate model uncertainty max min and min max regret temperature responses and optimal climate policies depend crucially on the choice of a particular climate model to illustrate the temperature responses to given emission reduction paths implied by the climate modules of the well known integrated assessments models dice fund and page are described and compared a dummy temperature module based on the climate denialists view is added using a simple welfare maximising growth model of the global economy the sensitivity of the optimal carbon price renewable energy subsidy and energy transition to each of these climate models is discussed the paper then derives max min max max and min max regret policies to deal with this particular form of climate model uncertainty and with climate scepticism the max min or min max regret climate policies rely on a non sceptic view of global warming and lead to a substantial and moderate amount of caution respectively the max max leads to no climate policies in line with the view of climate sceptics

climate tipping and economic growth precautionary capital and the price of carbon the optimal reaction to a climate tipping point that becomes more imminent with global warming is to be precautionary in adjusting capital to prepare for the calamity and to price carbon to make catastrophic change less imminent the saving response can be positive or negative if the mean lag for the impact of the catastrophe is long enough the saving response will be negative because the precautionary return in the keynes ramsey rule becomes negative we also show the separate effects of the elasticity of intertemporal substitution eis and the relative risk aversion rra using duffie epstein preferences focusing on a productivity catastrophe we calibrate our model and show how sensitive the policy responses are to the degrees of eis and rra the trend rate of economic growth the hazard rate and how long it takes for the catastrophe to have its full impact

income and wealth inequality and the life cycle a non parametric analysis for china this paper uses the techniques of non parametric density and regression estimation to estimate the chinese age income and age wealth distributions using survey data relating to 1987 although there is evidence of a clear life cycle profile of income earning and wealth accumulation the results suggest that only a small part of observed inequality can be explained by life cycle factors this finding contradicts the results of some other researchers

accounting for global warming risks resource management under event uncertainty abstract optimal management of atmospheric pollution is discussed with a special emphasis on the uncertainty concerning the occurrence of undesirable events associated with the greenhouse effect the uncertainty considered here stems from our ignorance of the exact pollution level required to trigger the event rather than from the genuinely stochastic nature of the processes involved taking atmospheric pollution level as the state variable it is found that uncertainty implies the existence of an equilibrium interval within which the emission rate of the greenhouse gases should be kept equal to the natural removal rate of these gases processes initiated outside the equilibrium interval must converge monotonically to its nearest endpoint the determination of the interval requires no knowledge of the optimal policy in contrast ignoring event occurrence risk implies a single equilibrium level attracting the optimal process from any initial level

a review of the stern review on the economics of climate change the stern review calls for immediate decisive action to stabilize greenhouse gases because the benefits of strong early action on climate change outweighs the costs the economic analysis supporting this conclusion consists mostly of two basic strands the first strand is a formal aggregative model that relies for its conclusions primari ly upon imposing a very low discount rate concerning this discount rate aspect i am skeptical of the review s formal analysis but this essay points out that we are actual ly a lot less sure about what interest rate should be used for discounting climate change than is commonly acknowledged the review s second basic strand is a more intuitive argument that it might be very important to avoid possibly large uncertain ties that are difficult to quantify concerning this uncertainty aspect i argue that it might be recast into sound analytical reasoning that might justify some of the review s conclusions the basic issue here is that spending money to slow global warming should perhaps not be conceptualized primarily as being about consump tion smoothing as much as being about how much insurance to buy to offset the small change of a ruinous catastrophe that is difficult to compensate by ordinary savings

optimal management with potential regime shifts we analyze how the threat of a potential future regime shift affects optimal management we use a simple general growth model to analyze four cases that involve combinations of stock collapse versus changes in system dynamics and exogenous versus endogenous probabilities of regime shift prior work in economics has focused on stock collapse with endogenous probabilities and reaches ambiguous conclusions on whether the potential for regime shift will increase or decrease intensity of resource use and level of resource stock we show that all other cases yield unambiguous results in particular with endogenous probability of regime shift that affects system dynamics the potential for regime shift causes optimal management to become precautionary in the sense of maintaining higher resource stock levels

optimal taxes on fossil fuel in general equilibrium we analyze a dynamic stochastic general equilibrium dsge model with an externality through climate change from using fossil energy our central result is a simple formula for the marginal externality damage of emissions or equivalently for the optimal carbon tax this formula which holds under quite plausible assumptions reveals that the damage is proportional to current gdp with the proportion depending only on three factors i discounting ii the expected damage elasticity how many percent of the output flow is lost from an extra unit of carbon in the atmosphere and iii the structure of carbon depreciation in the atmosphere thus the stochastic values of future output consumption and the atmospheric co2 concentration as well as the paths of technology whether endogenous or exogenous and population and so on all disappear from the formula we find that the optimal tax should be a bit higher than the median or most well known estimates in the literature we also formulate a parsimonious yet comprehensive and easily solved model allowing us to compute the optimal and market paths for the use of different sources of energy and the corresponding climate change we find coal rather than oil to be the main threat to economic welfare largely due to its abundance we also find that the costs of inaction are particularly sensitive to the assumptions regarding the substitutability of different energy sources and technological progress

making mobility visible a graphical device abstract this paper suggests a method of depicting mobility processes of income or earnings it makes use of nonparametric quantile regression based on bivariate kernel density estimation the method is illustrated with a comparison of german and us income mobility

models as usual for unusual risks on the value of catastrophic climate change we study the role of alternative intertemporal preference representations in a model of economic growth stock pollutant and endogenous risk of catastrophic collapse we contrast the traditional discounted utility model which assumes risk neutrality with respect to intertemporal utility with a multiplicative choice model that displays risk aversion in that dimension first we show that both representations of preferences can rationalize the same business as usual economy for a given interest rate and no pollution externality second once we introduce a collapse risk whose hazard rate is a function of the pollution stock multiplicative preferences recommend a much more stringent policy response an illustration in the context of climate change indicates that switching to the multiplicative preference representation has a similar effect in terms of policy recommendations as scaling up the schedule of the hazard rate by a factor of 100

the economic effects of climate change greenhouse gas emissions are fundamental both to the world s energy system and to its food production the production of co2 the predominant gas implicated in climate change is intrinsic to fossil fuel combustion specifically thermal energy is generated by breaking the chemical bonds in the carbohydrates oil coal and natural gas and oxidizing the components to co2 and h2o one cannot have cheap energy without carbon dioxide emissions similarly methane ch4 emissions an important greenhouse gas in its own right are necessary to prevent the build up of hydrogen in anaerobic digestion and decomposition one cannot have beef mutton dairy or rice without methane emissions climate change is the mother of all externalities larger more complex and more uncertain than any other environmental problem the sources of greenhouse gas emissions are more diffuse than any other environmental problem every company every farm every household emits some greenhouse gases the effects are similarly pervasive weather affects agriculture energy use health and many aspects of nature which in turn affects everything and everyone the causes and consequences of climate change are very diverse and those in low income countries who contribute least to climate change are most vulnerable to its effects climate change is also a long term problem some greenhouse gases have an atmospheric life time measured in tens of thousands of years the quantities of emissions involved are enormous in 2000 carbon dioxide emissions alone and excluding land use change were 24 billion metric tons of carbon dioxide tco2

nonparametric analysis of regional income dynamics the case of greece abstract the analysis relies on estimating a stochastic kernel and the associated with it ergodic density it also derives nonparametric quantiles to better assess relative regional income mobility the long run density implied by the estimates suggests neither strong polarization nor convergence

why has house price dispersion gone up we calibrate a dynamic general equilibrium island model to investigate the 30 year increase in the level of house prices and their dispersion across u s metropolitan areas the model is based on two main assumptions households o w in and out metropolitan areas in response to local productivity shocks and the housing supply cannot adjust instantly because of technological and regulatory constraints the calibration reveals that the observed tightening of housing supply regulation cannot quantitatively account for the rise in the level and dispersion of house prices in equilibrium workers o w out of tightly regulated towards less regulated metropolitan areas undoing most of the price impact of local supply restrictions in contrast the observed increase in wage dispersion across metropolitan areas does create the observed increase in the level and dispersion of house prices workers o w towards exceptionally productive metropolitan areas and drive house prices up the calibration also suggests that the welfare eects of housing supply regulation are large when wages become more dispersed

trading frictions and house price dynamics we model liquidity in housing markets the model provides a simple characterization for the joint process of prices sales and inventory we compare the implications of the model to certain properties of housing markets the model can generate the large price changes and the positive correlation between prices and sales that we see in the data unlike the data prices are negatively autocorrelated and high inventory predicts price appreciation we investigate several amendments to the model informational frictions show promise

segmented housing search we study housing markets with multiple segments searched by heterogeneous clienteles in the san francisco bay area search activity and inventory covary negatively across cities but positively across market segments within cities a quantitative search model shows how the endogenous flow of broad searchers to high inventory segments within their search ranges induces a positive relationship between inventory and search activity across segments with a large common clientele the prevalence of broad searchers shapes the response of housing markets to localized supply and demand shocks broad searchers help spread shocks across many segments and reduce their effect on local market activity

precautionary saving in the small and in the large the theory of precautionary saving is shown to be isomorphic to the arrow pratt theory of risk aversion making possible the application of a large body of knowledge about risk aversion to precautionary saving and more generally to the theory of optimal choice under risk in particular a measure of the strength of the precautionary saving motive analogous to the arrow pratt measure of risk aversion is used to establish a number of new propositions about precautionary saving and to give a new interpretation of the dreze modigliani substitution effect copyright 1990 by the econometric society