Scandinavian Working Papers in Economics

Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

No 369: The Consequences of Uncertainty: Climate Sensitivity and Economic Sensitivity to the Climate

John Hassler (), Per Krusell () and Conny Olovsson ()
Additional contact information
John Hassler: IIES, Stockholm University, University of Gothenburgh, CEPR and SEM
Per Krusell: IIES, Stockholm University, University of Gothenburg, CEPR and NBER
Conny Olovsson: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, 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.

Keywords: Climate change; integrated assessment model; uncertainty

JEL-codes: E60; H23; O44; Q43; Q54

35 pages, March 1, 2019

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