Fat-tailed uncertainty in the economics of catastrophic climate change

Abstract

In this article, the author revisits some basic issues concerning structural uncertainty and catastrophic climate change. The author presents intuitive-empirical arguments for structural uncertainties at the heart of climate change economics and discusses some theoretical aspects of fat-tailed extreme events and their policy implications. Core concepts of fat-tailed uncertainty and the economics of catastrophic climate change could have been expressed in alternative mathematical structures, with similar conclusions. The author argues that the seeming immunity of the “standard” benefit-cost analysis (BCA) of climate change to the possibility of extreme possibilities is peculiar and disturbing as it may not be robust with respect to the modeling of catastrophic outcomes. – AI-generated abstract.