Tail-Hedge Discounting and the Social Cost of Carbon

DSpace/Manakin Repository

Tail-Hedge Discounting and the Social Cost of Carbon

Citable link to this page

 

 
Title: Tail-Hedge Discounting and the Social Cost of Carbon
Author: Weitzman, Martin L.
Citation: Weitzman, Martin L. 2013. “Tail-Hedge Discounting and the Social Cost of Carbon.” Journal of Economic Literature 51, no. 3: 873–882.
Full Text & Related Files:
Abstract: The choice of an overall discount rate for climate change investments depends critically on how different components of investment payoffs are discounted at differing rates reflecting their underlying risk characteristics. Such underlying rates can vary enormously, from ≈1 percent for idiosyncratic diversifiable risk to ≈7 percent for systematic nondiversifiable risk. Which risk-adjusted rate is chosen can have a huge impact on cost-benefit analysis. In this expository paper, I attempt to set forth in accessible language with a simple linear model what I think are some of the basic issues involved in discounting climate risks. The paper introduces a new concept that may be relevant for climate-change discounting: the degree to which an investment hedges against the bad tail of catastrophic damages by insuring positive expected payoffs even under the worst circumstances. The prototype application is calculating the social cost of carbon.
Published Version: doi:10.1257/jel.51.3.873
Terms of Use: This article is made available under the terms and conditions applicable to Other Posted Material, as set forth at http://nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of-use#LAA
Citable link to this page: http://nrs.harvard.edu/urn-3:HUL.InstRepos:12841971
Downloads of this work:

Show full Dublin Core record

This item appears in the following Collection(s)

 
 

Search DASH


Advanced Search
 
 

Submitters