CLIMATE POLICY WHEN THE DISTANT FUTURE MATTERS: CATASTROPHIC EVENTS WITH HYPERBOLIC DISCOUNTING

Abstract

Low probability catastrophic climate change can have a signifcant influence on policy under hyperbolic discounting. We compare the set of Markov Perfect Equilibria (MPE) to the optimal policy under time-consistent commitment. For some initial levels of risk there are multiple MPE; these may involve either excessive or insufficient stabilization effort. These results imply that even if the free-rider problem amongst contemporaneous decision-makers were solved, there may remain a coordination problem amongst successive generations of decision-makers. A numerical example shows that under plausible conditions society should respond vigorously to the threat of climate change.abrupt climate change, event uncertainty, catastrophic risk, hyperbolic discounting, Markov Perfect Equilibria, Environmental Economics and Policy, C61, C73, D63, D99, Q54,