Risk aversion, intergenerational equity and climate change.

Abstract

The paper investigates a climate-economy model with an iso-elastic welfare function in which one parameter gamma measures relative risk-aversion and a distinct parameter rho measures resistance to intertemporal substitution. We show both theoretically and numerically that climate policy responds differently to variations in the two parameters. In particular, we show that higher gamma but lower rho leads to increase emissions control. We also argue that climate-economy models based on intertemporal expected utility maximization, i.e. models where gamma = rho, may misinterpret the sensitivity of the climate policy to risk-aversion.risk aversion; equity; discounting; climate change