Thursday, August 19, 2010

But a commentary in the Beijing Daily last week said that an increased frequency of disasters meant that "climate change presents a real threat to China's natural ecological systems and economic and social development."

Here is the academic research follow-up to the previous post.  The modelling of low probability of extreme events is a useful exercise (as the recent financial crisis also proves).

Yu-Fu Chen
University of Dundee - Department of Economic Studies

Michael Funke
University of Hamburg - Department of Economics and Business Administration; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

July 29, 2010

CESifo Working Paper Series No. 3139

The possibility of low-probability extreme events has reignited the debate over the optimal intensity and timing of climate policy. In this paper we therefore contribute to the literature by assessing the implications of low-probability extreme events on environmental policy in a continuous-time real options model with “tail risk”. In a nutshell, our results indicate the importance of tail risk and call for foresighted pre-emptive climate policies.
Keywords: climate policy, extreme events, real options, Levy process
JEL Classifications: D81, Q54, Q58
Working Paper Series


No comments: