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The Consequences of Uncertainty: Climate Sensitivity and Economic Sensitivity to the Climate

Author

Listed:
  • Hassler, John

    (IIES, Stockholm University, University of Gothenburgh, CEPR and SEM)

  • Krusell, Per

    (IIES, Stockholm University, University of Gothenburg, CEPR and NBER)

  • Olovsson, Conny

    (Research Department, Central Bank of Sweden)

Abstract
We construct an integrated assessment model with multiple energy sources-two fossil fuels and “green energy" - and use it to evaluate ranges of plausible estimates for the climate sensitivity as well as for the sensitivity of the economy to climate change. Rather than focusing on uncertainty explicitly, we look at extreme scenarios defined by the upper and lower limits given in available studies in the literature. We compare optimal policy with laissez faire and we point to the possible policy errors that could arise. By far the largest policy error arises when the climate policy is “overly passive"; “overly zealous" climate policy (i.e., a high carbon tax applied when climate change and its negative on the economy are very limited) does not hurt the economy much as there is considerable substitutability between fossil and non-fossil energy sources.

Suggested Citation

  • Hassler, John & Krusell, Per & Olovsson, Conny, 2019. "The Consequences of Uncertainty: Climate Sensitivity and Economic Sensitivity to the Climate," Working Paper Series 369, Sveriges Riksbank (Central Bank of Sweden).
    • Handle: RePEc:hhs:rbnkwp:0369
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Climate change; integrated assessment model; uncertainty;
    All these keywords.

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • O44 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Environment and Growth
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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