University of Dundee - Department of Economic Studies
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