Intertemporal accounting of climate change - Harmonizing economic efficiency and climate stewardship

Continuing a discussion on the intertemporal accounting of climate-change damages initiated by Nordhaus, Heal and Brown in response to the recent demonstration of Hasselmann et al. that standard exponential discounting applied uniformly to all goods and services invariably leads to a `climate catastrophe' in cost-benefit analyses, it is argued that (1) there exists no economically satisfactory alternative to cost-benefit analysis for the determination of optimal climate protection strategies, and (2) it is essential to allow for the different long-term evolution of climate damage costs relative to mitigation costs in determining the optimal cost-benefit solution. A climate catastrophe can be avoided only if it is assumed that climate damage costs increase significantly in the long term relative to mitigation costs. Cost-benefit analysis is regarded here in the generalized sense of optimizing a social welfare function that incorporates all relevant `quality-of-life' factors, including not only consumption and the value of the environment, but also the ethical values of equitable intertemporal and intrasocietal distribution. Thus, economic efficiency and climate stewardship are not regarded as conflicting goals, but as synonyms for a single encompassing economic optimization exercise. The same reasoning applies generally to the problem of sustainable development. To quantify the concept of sustainable development in cost-benefit analyses, the projected time evolution of the future values of natural resources and the environment (judged by the present generation, acting as representative agents of future generations) must be related to the time-evolution of all other relevant quality-of-life factors. Different ethical interpretations of the concept of sustainable development can be readily operationalized by incorporation in a generalized cost-benefit analysis in which the evolution paths of all relevant material and ethical values are explicitly specified

Realizing stock market crashes: stochastic cusp catastrophe model of returns under the time-varying volatility

This paper develops a two-step estimation methodology, which allows us to apply catastrophe theory to stock market returns with time-varying volatility and model stock market crashes. Utilizing high frequency data, we estimate the daily realized volatility from the returns in the first step and use stochastic cusp catastrophe on data normalized by the estimated volatility in the second step to study possible discontinuities in markets. We support our methodology by simulations where we also discuss the importance of stochastic noise and volatility in deterministic cusp catastrophe model. The methodology is empirically tested on almost 27 years of U.S. stock market evolution covering several important recessions and crisis periods. Due to the very long sample period we also develop a rolling estimation approach and we find that while in the first half of the period stock markets showed marks of bifurcations, in the second half catastrophe theory was not able to confirm this behavior. Results suggest that the proposed methodology provides an important shift in application of catastrophe theory to stock markets

Assessing, Managing, and Financing Extreme Events: Dealing with Terrorism

This paper discusses new challenges we face with terrorism as a catastrophic risk by focusing on risk assessment, risk management as well as risk financing issues. The special characteristics of terrorism compared with major natural hazards call for the development of public-private partnerships, as recognized in November 2002 when the Terrorism Risk Insurance Act of 2002 (TRIA) was passed. This paper shows, however, that the temporary insurance system established by TRIA is neither a complete answer nor a definitive one. It raises fundamental questions for U.S. insurers as to how they will estimate the risk in order to set premiums for terrorist coverage that they now must offer to their clients. We discuss some of the most recent developments of terrorism models for helping insurers and reinsurers assess the premiums they should charge and how much coverage they can assume as well as for firms to better understand their exposure. Since the passage of TRIA, the current level of demand for insurance coverage has remained low and we discuss some factors that may contribute to it. After presenting alternative foreign public-private partnerships and discussing the potential role for terrorist catastrophe bonds, we provide some features of a more sustainable program for terrorism insurance in the U.S. after December 31, 2005.

Deterministic chaos theory and forecasting in Social Sciences. Contribution to the discussion

Forecasting social phenomena may be hampered in many ways. This is because in nature of these phenomena lies strong and multilateral connection with other social phenomena; but not only – also physical and biological (natural) ones. The content of this publication constitutes presentation of chosen problems of forecasting in social sciences. The attention in the article was focused among others on deterministic chaos theory, on the attempt of its implementation to phenomena from the scope (or from borderline) of social sciences: economy, logistics, science about safety etc. Moreover, one of the threads of ponderation was the attempt to consider whether it’s possible to create so-called final theory. The aim of the publication is to signalize possibilities of taking advantage of seemingly exotic for “political scientists” methodology of modeling and explaining phenomena, having its source in exact sciences (in chaos theory) to study social phenomena and processes

Responding to Threats of Climate Change Mega-Catastrophes

There is a low but uncertain probability that climate change could trigger “mega-catastrophes,” severe and at least partly irreversible adverse effects across broad regions. This paper first discusses the state of current knowledge and the defining characteristics of potential climate change mega-catastrophes. While some of these characteristics present difficulties for using standard rational choice methods to evaluate response options, there is still a need to balance the benefits and costs of different possible responses with appropriate attention to the uncertainties. To that end, we present a qualitative analysis of three options for mitigating the risk of climate mega-catastrophes—drastic abatement of greenhouse gas missions, development and implementation of geoengineering, and large-scale ex ante adaptation— against the criteria of efficacy, cost, robustness, and flexibility. We discuss the composition of a sound portfolio of initial investments in reducing the risk of climate change mega-catastrophes.climate change, catastrophe, risk, decisionmaking under uncertainty

Responding to Threats of Climate Change Mega-Catastrophes

There is a low but uncertain probability that climate change could trigger "mega-catastrophes," severe and at least partly irreversible adverse effects across broad regions. This paper first discusses the state of current knowledge and the defining characteristics of potential climate change mega-catastrophes. While some of these characteristics present difficulties for using standard rational choice methods to evaluate response options, there is still a need to balance the benefits and costs of different possible responses with appropriate attention to the uncertainties. To that end, we present a qualitative analysis of three options for mitigating the risk of climate mega-catastrophes--drastic abatement of greenhouse gas emissions, development and implementation of geoengineering, and large-scale ex ante adaptation--against the criteria of efficacy, cost, robustness, and flexibility. We discuss the composition of a sound portfolio of initial investments in reducing the risk of climate change mega-catastrophes.

Economic impacts of climate change on cities: A survey of the existing literature

This paper attempts a survey of the existing literature on the direct market impacts of climate change on urban centers. In the first chapter, the argument for the importance of cities as case studies for research on the impacts of climate change is established using current population data and future projections. In the second chapter, a brief overview of how we can go from the global level to the regional level, when we consider the impacts of climate change, is given. In the third chapter, we examine the models and their estimates for the sea level rise impacts on cities. In the fourth chapter, we summarize the impacts of increasing temperature. In the last two chapters, we elaborate on the current limitations and we present some conclusions. --