nep-ene New Economics Papers
on Energy Economics
Issue of 2007‒10‒20
twenty-six papers chosen by
Roger Fouquet
Imperial College, UK

  1. Measuring Welfare in Restructured Electricity Markets By Erin T. Mansur
  2. The Stability and Volatility of Electricity Prices: An Illustration of (lambda, sigma-2) Analysis By Bask, Mikael; Widerberg, Anna
  3. Vertical Arrangements, Market Structure, and Competition An Analysis of Restructured U.S. Electricity Markets By James B. Bushnell; Erin T. Mansur; Celeste Saravia
  4. Forecasting Weekly Electricity Prices at Nord Pool By Hipòlit Torró
  5. Do Oligopolists Pollute Less? Evidence from a Restructured Electricity Market By Erin T. Mansur
  6. Is Real-Time Pricing Green? The Environmental Impacts of Electricity Demand Variance By Stephen P. Holland; Erin T. Mansur
  7. Les approches volontaires de l'environnement : outils au service de l’environnement ou instrument stratégique pour les entreprises ?<br />Une analyse du secteur de la fourniture d’électricité. By Nadine Levratto; Nader Abbes
  8. Averting Regulatory Enforcement: Evidence from New Source Review By Nathaniel Keohane; Erin T. Mansur; Andrey Voynov
  9. Modelling and Forecasting Oil Prices: The Role of Asymmetric Cycles By Jesus Crespo Cuaresma; Adusei Jumah; Sohbet Karbuz
  10. Oil supply news in a VAR: Information from financial markets By Alessio Anzuini; Patrizio Pagano; Massimiliano Pisani
  11. Why are the Effects of Recent Oil Price Shocks so Small? By Torsten Schmidt; Tobias Zimmermann
  12. Russian and European gas interdependence. Can market forces balance out geopolitics? By Dominique Finon; Catherine Locatelli
  14. Investimentos em infra-estrutura no Nordeste: projeções de impacto e perspectivas de desenvolvimento By Edson Paulo Domingues; Francisca Diana Ferreira Viana; Heder Carlos de Oliveira
  15. Food Security and Biofuels Development: The Case of China By Fengxia Dong
  16. Learning to Grow: A Comparative Analysis of the Wind Energy Sector in Denmark and India By Kari Kristinsson; Rekha Rao
  17. Scenarios of transition to sustainable oil extraction in Russia By Andreeva, Anastasiya; Bazhanov, Andrei
  18. Análisis de la distribución de las emisiones de CO2 a nivel internacional mediante la adaptación del concepto y las medidas de polarización By Juan Antonio Duro Moreno; Emilio Padilla Rosa
  19. Environmental lobbying with imperfect monitoring of environmental quality By Beard, Rodney; Mallawaarachchi, Thilak; Salerno, Gillian
  20. Legal Families and Environmental Protection: Is there a Causal Relationship? By Giuseppe Di Vita
  21. Trade, Technique and Composition Effects: What is Behind the Fall in World-wide SO2 Emissions, 1990-2000? By de Melo, Jaime; Grether, Jean-Marie; Mathys, Nicole Andréa
  22. Equity and CO2 Emissions Distribution in Climate Change Integrated Assessment By Emilio Padilla Rosa
  23. Climate Change and Sustainable Development By Tariq Banuri; Hans Opschoor
  24. An Econometric Analysis of Emission Trading Allowances By Marc S. Paoletta; Luca Taschini
  25. The Social Cost of Carbon: Trends, Outliers and Catastrophes By Tol, Richard S.J.
  26. Structural Uncertainty and the Value of Statistical Life in the Economics of Catastrophic Climate Change By Martin Weitzman

  1. By: Erin T. Mansur
    Abstract: Restructuring electricity markets has enabled wholesalers to exercise market power. Using a common method of measuring competitive behavior in these markets, several studies have found substantial inefficiencies. This method overstates actual welfare loss by ignoring production constraints that result in non-convex costs. I develop an alternative method that accounts for these constraints and apply it to the Pennsylvania, New Jersey, and Maryland market. For the summer following restructuring, the common method implies that market imperfections resulted in considerable welfare loss, with actual production costs exceeding the competitive model's estimates by 13 to 21 percent. In contrast, my method finds that actual costs were only between three and eight percent above the competitive levels. In particular, it is the fringe firms whose costs increase, while strategic firms reduce production and costs.
    JEL: L13 L94
    Date: 2007–10
  2. By: Bask, Mikael (Monetary Policy and Research Department, Bank of Finland); Widerberg, Anna (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: The aim of this letter is to discuss and illustrate what we call (lambda, sigma-2)analysis, which is a method to distinguish between the stability of a stochastic dynamic system and the volatility of a variable generated by this system. It is also emphasized that this method is able to generate new research questions for economic theory. The data set used in an empirical illustration is spot electricity prices from Nord Pool.<p>
    Keywords: Smooth Lyapunov Exponents; Stability; Stochastic Dynamic System; Volatility
    JEL: C14 C22
    Date: 2007–10–09
  3. By: James B. Bushnell; Erin T. Mansur; Celeste Saravia
    Abstract: This paper examines vertical arrangements in electricity markets. Vertically integrated wholesalers, or those with long-term contracts, have less incentive to raise wholesale prices when retail prices are determined beforehand. For three restructured markets, we simulate prices that define bounds on static oligopoly equilibria. Our findings suggest that vertical arrangements dramatically affect estimated market outcomes. Had regulators impeded vertical arrangements (as in California), our simulations imply vastly higher prices than observed and production inefficiencies costing over 45 percent of those production costs with vertical arrangements. We conclude that horizontal market structure accurately predicts market performance only when accounting for vertical structure.
    JEL: L11 L13 L94
    Date: 2007–10
  4. By: Hipòlit Torró (Universitat de València)
    Abstract: This paper analyses the forecasting power of weekly futures prices at Nord Pool. The forecasting power of futures prices is compared to an ARIMAX model of the spot price. The time series model contains lagged external variables such as: temperature, precipitation, reservoir levels and the basis (futures price less the spot price); and generally reflects the typical seasonal patterns in weekly spot prices. Results show that the time series model forecasts significantly beat futures prices when using the Diebold and Mariano (1995) test. Furthermore, the average forecasting error of futures prices reveals that they are significantly above the settlement spot price at the ‘delivery week’ and their size increases as the time to maturity increases. Those agents taking positions in weekly futures contracts at Nord Pool might find the estimated ARIMAX model useful for improving their expectation formation process for the underlying spot price.
    Keywords: Electricity Markets, Power Derivatives and Forecasting Electricity Prices
    JEL: G13 L94
    Date: 2007–09
  5. By: Erin T. Mansur
    Abstract: Electricity restructuring has created the opportunity for producers to exercise market power. Oligopolists increase price by distorting output decisions, causing cross-firm production inefficiencies. This study estimates the environmental implications of production inefficiencies attributed to market power in the Pennsylvania, New Jersey, and Maryland electricity market. Air pollution fell substantially during 1999, the year in which both electricity restructuring and new environmental regulation took effect. I find that strategic firms reduced their emissions by approximately 20% relative to other firms and their own historic emissions. Next, I compare observed behavior with estimates of production, and therefore emissions, in a competitive market. According to a model of competitive behavior, changing costs explain approximately two-thirds of the observed pollution reductions. The remaining third can be attributed to firms exercising market power.
    JEL: H23 L13 L33 L94 Q53
    Date: 2007–10
  6. By: Stephen P. Holland; Erin T. Mansur
    Abstract: Real-time pricing (RTP) of electricity would improve allocative efficiency and limit wholesalers' market power. Conventional wisdom claims that RTP provides additional environmental benefits. This paper argues that RTP will reduce the variance, both within- and across-days, in the quantity of electricity demanded. We estimate the short-run impacts of this reduction on SO2, NOx, and CO2 emissions. Reducing variance decreases emissions in regions where peak demand is met more by oil-fired capacity than by hydropower, such as the Mid-Atlantic. However, reducing variance increases emissions in more US regions, namely those with more hydropower like the West. The effects are relatively small.
    JEL: L51 L94 Q53
    Date: 2007–10
  7. By: Nadine Levratto (EconomiX - [CNRS : UMR7166] - [Université de Paris X - Nanterre]); Nader Abbes (EconomiX - [CNRS : UMR7166] - [Université de Paris X - Nanterre])
    Abstract: Ce texte s’intéresse aux conséquences de la multiplication des contrats d’électricité dite verte sur l’objectif global de pollution à atteindre et sur l’organisation du marché de la fourniture d’électricité. En établissant des liens entre les différents textes qui organisent ce marché, en tirant les enseignements des expériences de labellisation des produits réalisées dans d’autres secteurs et en rendant compte de l’évolution des instruments des politiques environnementales, nous montrons que les contrats verts, forme d’approche volontaire adoptée par les fournisseurs d’électricité, est moins efficace que d’autres dispositifs, tarif d’achat réglementé en tête, pour augmenter le recours aux énergies renouvelables. Ils ont en revanche des effets réels sur l’organisation et la segmentation du marché.
    Keywords: approches volontaire, marché de l’électricité, énergies renouvelables, responsabilité environnementale
    Date: 2007–11
  8. By: Nathaniel Keohane; Erin T. Mansur; Andrey Voynov
    Abstract: This paper explores firms' response to regulatory enforcement. New Source Review, a provision of the Clean Air Act, imposes stringent emissions limitations on significantly modified older power plants. In 1999, the EPA sued owners of 46 plants for NSR violations. We study how electricity companies respond to both the perceived threat of future action, and the action itself. A discrete choice model estimates plants likelihood of being named in lawsuits increases with large historic emissions and investments. On the eve of the lawsuits, emissions at plants with a one standard deviation greater probability of being sued fell approximately ten percent.
    JEL: L51 L94 Q52 Q58
    Date: 2007–10
  9. By: Jesus Crespo Cuaresma; Adusei Jumah; Sohbet Karbuz
    Abstract: We propose a new time series model aimed at forecasting crude oil prices. The proposed specification is an unobserved components model with an asymmetric cyclical component. The asymmetric cycle is defined as a sine-cosine wave where the frequency of the cycle depends on past oil price observations. We show that oil price forecasts improve significantly when this asymmetry is explicitly modelled.
    Keywords: Oil price, forecasting, nonlinear time series analysis, asymmetric cycles.
    JEL: C22 O13 C53
  10. By: Alessio Anzuini (Bank of Italy, Economic Research Department); Patrizio Pagano (Bank of Italy, Economic Research Department); Massimiliano Pisani (Bank of Italy, Economic Research Department)
    Abstract: This paper analyzes the macroeconomic effects on the U.S. economy of news about oil supply by estimating a VAR. Information contained in daily quotations of oil futures contracts is exploited to estimate the dynamic path of oil prices following a shock. Hence, differently from the VAR literature on oil shocks we do not need to rely on recursive identification. Impulse response functions suggest that oil supply disruptions have stagflationary effects on the U.S. economy. Historical decomposition shows that oil shocks contributed significantly to the US recessions of the last thirty years, but not all exogenous increases in oil prices induced a recession. Finally, the contribution of oil shocks to inflation fluctuations seems to have declined over time.
    Keywords: vector autoregression, oil shock, futures, news
    JEL: C2 E3 O41
    Date: 2007–06
  11. By: Torsten Schmidt; Tobias Zimmermann
    Abstract: Recent oil price shocks have relatively small effects on real economic activity and inflation compared to the experiences of the seventies and the early eighties. In this paper we analyse possible reasons for these phenomena using the example of the German economy. At first, by estimating a VAR-model and calculating impulse responses to an oil price shock it is confirmed that the macroeconomic effects have become much smaller. Moreover, our simulations show that oil price hikes are more closely related to global economic activity since the early nineties.Then, to get a deeper understanding of the structural changes which are responsible for these results we utilize a new Keynesian open economy model. It becomes obvious that the small effects of the recent oil price shocks on the German economy can be explained by a combination of a reduced energy cost share and good luck in terms of a strong growing global economy. Hence, if global economic growth decreases, pure oil price shocks may still have substantial effects on the German economy, even if the energy pricevulnerability has been reduced.These results should be valid also for other oil importing countries, at least from a qualitative point of view.
    Keywords: Oil prices, new Keynesian open economy model
    JEL: E31 E32 F41
    Date: 2007–09
  12. By: Dominique Finon (CIRED - Centre international de recherche sur l'environnement et le développement - [CIRAD : UMR56][CNRS : UMR8568] - [Ecole des Hautes Etudes en Sciences Sociales][Ecole Nationale des Ponts et Chaussées][Ecole Nationale du Génie Rural des Eaux et des Forêts]); Catherine Locatelli (LEPII - Laboratoire d'Economie de la Production et de l'Intégration Internationale - [CNRS : FRE2664] - [Université Pierre Mendès-France - Grenoble II])
    Abstract: This article analyses the economic risk associated with the dominant position of the Russian vendor in the European market, with a view to assessing the relevance of possible responses by European nations or the EU. It considers various aspects of the Russian vendor's dependence on the European market, before turning to the risks that Gazprom exerts market power on the European market. It concludes by considering the relevance of the possible responses open to the EU and member states to limit any risks by creating a gas single buyer or more simply by encouraging the development of a denser pan-European network, with additional sources of supply and increased market integration.
    Date: 2007–01
  13. By: Valadkhani, Abbas (University of Wollongong)
    Abstract: The critical review undertaken in this paper pinpoints some of the major deficiencies and the strength of the earlier macroeconometric models (MEMs) constructed for Iran as a major oil exporting country. In constructing a new MEM, the flaws of past MEMs should be rectified and their strengths need to be retained. Most of the equations in these models are directly and indirectly affected by oil and gas exports and/or value added in the oil sector. Two dualities are observed in most models, viz. the traditional duality of the agriculture sector and industrial modern sector, and the oil duality featured by an enclave modern oil sector with negligible links to the rest of the economy. Similar to the MEMs constructed for other developing countries, only a few models have been subject to various parametric and diagnostic tests prior to their release. Not all model-builders tested for a simultaneity problem in determining the estimation method. In future MEMs substantial attention should be placed on the equations for capital formation, price, wage, investment, exchange rate, unemployment, channels of distribution and demographic characteristics. It appears that the majority of the earlier models suffered from excessive "Keynesianism", which means the modellers gave insufficient attention to the role of the supply side in the long run.
    Keywords: Macroeconometric modelling, Iranian economy, Oil exporting countries
    JEL: B23 C52 C51
    Date: 2007
  14. By: Edson Paulo Domingues (Cedeplar-UFMG); Francisca Diana Ferreira Viana (Cedeplar-UFMG); Heder Carlos de Oliveira (Cedeplar-UFMG)
    Abstract: This paper analyzes a set of infrastructure programs (Sewer, Housing, Transports, Communications and Energy) in the Northeast region of Brazil, announced by the federal government in the scope of the PAC (Plano de Aceleração do Crescimento). We use an interregional computable general equilibrium model in order to estimate short run and long run impacts in the region’s states. The results indicate the potential impact of these projects on growth and regional inequality.
    Keywords: regional economics; regional inequality; infrastructure; computable general equilibrium; Brazil
    JEL: R11 R13 R40 C68
    Date: 2007–09
  15. By: Fengxia Dong (Center for Agricultural and Rural Development (CARD); Food and Agricultural Policy Research Institute (FAPRI))
    Abstract: Biofuels production is expanding rapidly all over the world, driven by rising crude oil prices, the desire of countries to be energy independent, and concerns about climate change. As developed countries, especially the United States, are expanding biofuels production, developing countries are expanding their biofuels industries as well, to power their growing economies. However, developing countries must address the food security issue when they develop biofuels. As China is a developing country with rapid economic growth, population growth, significant demand for fuels, and food security concerns, it serves as a good example for studying the opportunities and challenges faced by developing countries under current conditions. This study analyzes the background, history, and current situation of biofuels development in China. Some implications for developing countries are also provided.
    Keywords: biofuels, food security, China.
    Date: 2007–10
  16. By: Kari Kristinsson; Rekha Rao
    Abstract: This paper uses sectoral systems of innovation framework to examine the relationship between technology policy and industrial development by comparing the emergence of the wind energy sector in Denmark and India. Since the late 1970s Denmark has led the development of a global wind energy industry and in 2004 wind energy supplied 18,8% percent of Denmark’s electricity consumption. India was however a late entrant that managed in a few years to establish itself as the fifth largest producer of wind energy in the world. We suggest that India’s unique policy of ‘interactive learning’ with international and especially Danish actors, instead of imitation of foreign technology policies and institutions, was a substantial contributor to India’s success in developing their wind energy industry.
    Keywords: Wind energy industry; Denmark; India; sectoral systems of innovation
    JEL: O38 Q48
    Date: 2007
  17. By: Andreeva, Anastasiya; Bazhanov, Andrei
    Abstract: The rates of oil depletion are increasing during the last ten years in Russia and the Russian Energy Program, approved by the government, implies further growth of oil production by 2020. We used the transition curves analysis in aggregate model to examine the long-run consumption along different possible paths of oil extraction. We conclude that the long-run consumption along the paths associated with the Energy Program is about twice as less as the consumption along the paths switching to sustainable extraction in the short run.
    Keywords: Nonrenewable resource; Sustainable development; Transition curve analysis
    JEL: Q38 Q32
    Date: 2007–10–08
  18. By: Juan Antonio Duro Moreno (Departament d'Economia, Universitat Rovira i Virgili); Emilio Padilla Rosa (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona)
    Abstract: La medida de la polarización está ligada a la inestabilidad potencial —la aparición de grupos con intereses opuestos— generada por una situación de distribución específica. Esta investigación analiza la distribución internacional de las emisiones de CO2 per cápita a través de la adaptación del concepto y las medidas de polarización. La descripción agrupada más interesante que se deriva del análisis de polarización es la de dos grupos. Estos grupos coinciden ampliamente con los países del Anexo B del Protocolo de Kyoto y los que no lo son, lo que podría indicar la capacidad del análisis de polarización para explicar la generación de grupos en el mundo real. El análisis muestra una reducción significativa en la polarización internacional de las emisiones de CO2 per cápita entre 1971 y 2001. Esto se explica en gran parte por el aumento en las emisiones experimentado por China e India. Una reducción en la polarización puede implicar una reducción en la dificultad de alcanzar acuerdos. No obstante, la polarización no ha cambiado mucho desde 1995 o 1997 (año en que tuvieron lugar las negociaciones de Kyoto), lo que podría indicar que la polarización de la distribución de emisiones entre países es aún uno de los factores importantes llevando a la dificultad en alcanzar nuevos acuerdos respecto a las políticas globales de
    Keywords: acuerdos internacionales; distribución internacional de CO2; emisiones de CO2; formación de grupos de países; polarización
    JEL: D39 Q43 Q56
    Date: 2007–09
  19. By: Beard, Rodney; Mallawaarachchi, Thilak; Salerno, Gillian
    Abstract: In this paper we present a two stage game of political lobbying for policies designed to enhance environmental quality. Unlike previous work which has tended to assume perfect monitoring of environmental quality in lobbying games we allow for imperfect monitoring of environmental quality. We characterize perfect public (politico-economic) equilibria in the game for the case of both perfect and imperfect monitoring of environmental quality and compare these with imperfect private monitoring of environmental quality. Results are discussed with respect to farmer behaviour in the context of non-point source pollution and implications for the political consequences of farm extension programmes highlighted.
    Keywords: Game theory; public choice; imperfect public monitoring; imperfect private monitoring; non-point source pollution; agricultural extension and public education
    JEL: Q5 Q1 C73
    Date: 2007–02
  20. By: Giuseppe Di Vita (University of Catania)
    Abstract: In this paper we build up the analysis of La Porta et al. (1998), to investigate the importance of legal families in explaining the variations in pollution emissions in different countries. The main intuition behind our analysis is that the nations in which the rights of shareholders are more protected, promote real and financial investment; this increases the speed at which the per-capita income corresponding to the declining branch of the Environmental Kutznets Curve (EKC) is achieved. In econometrics different regression analyses were performed using as dependent variables three different kinds of pollutants (CO2, fine suspended particulates and waste), including as an explanation some financial variables never before considered in this kind of study.
    Keywords: Dummy Variables, Environmental Kutznets Curve, Legal Families, Panel Data, Pollution Emissions
    JEL: K4 Q0
    Date: 2007–07
  21. By: de Melo, Jaime; Grether, Jean-Marie; Mathys, Nicole Andréa
    Abstract: Combining unique data bases on emissions with sectoral output and employment data, we study the sources of the fall in world-wide SO2 emissions and estimate the impact of trade on emissions. Contrarily to concerns raised by environmentalists, an emission-decomposition exercise shows that scale effects are dominated by technique effects working towards a reduction in emissions. A second exercise comparing the actual trade situation with an autarky benchmark estimates that trade, by allowing clean countries to become net importers of emissions, leads to a 10% increase in world emissions with respect to autarky in 1990, a figure that shrinks to 3.5% in 2000. Additionally, back-of-the-envelope calculations suggest that emissions related to transport are of smaller magnitude, roughly 3% in both periods. In a third exercise, we use linear programming to simulate extreme situations where world emissions are either maximal or minimal. It turns out that effective emissions correspond to a 90% reduction with respect to the worst case, but that another 80% reduction could be reached if emissions were minimal.
    Keywords: decomposition; embodied emissions in trade; Environment; Growth; Trade; transport
    JEL: F11 Q56
    Date: 2007–10
  22. By: Emilio Padilla Rosa (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona)
    Abstract: Emissions distribution is a focus variable for the design of future international agreements to tackle global warming. This paper specifically analyses the future path of emissions distribution and its determinants in different scenarios. Whereas our analysis is driven by tools which are typically applied in the income distribution literature and which have recently been applied to the analysis of CO2 emissions distribution, a new methodological approach is that our study is driven by simulations run with a popular regionalised optimal growth climate change model over the 1995-2105 period. We find that the architecture of environmental policies, the implementation of flexible mechanisms and income concentration are key determinants of emissions distribution over time. In particular we find a robust positive relationship between measures of inequalities
    Date: 2007–09
  23. By: Tariq Banuri; Hans Opschoor
    Abstract: This paper argues that in the future the primary focus of policy research and global agreements should be the de-carbonization of economic development. Consequently, instead of treating climate stabilization and economic development as separate and equal, the strategy should be to re-integrate the two global policy goals, in part by separating responsibility (and funding) from action. This will require an approach that goes beyond Kyoto. The paper invokes the example of the Manhattan Project to argue for a massive, globally funded public investment program for the deployment of renewable energy technologies in developing countries.
    Keywords: carbon emissions, climate change, sustainable development, international cooperation, mitigation, adaptation
    JEL: Q51 Q54 Q56 F59 H23 H87
    Date: 2007–10
  24. By: Marc S. Paoletta (University of Zurich and Swiss Finance Institute); Luca Taschini (University of Zurich)
    Abstract: World power and gas markets have a natural relationship with global tradable carbon permits markets, including the U.S. Clean Air Act Amendments and the EU Emissions Trading Scheme, the latter officially launched in January 2005. Electric utilities operate their power plants based in part on the price of the power and the relative cost of coal and natural gas. As both carbon dioxide and sulphur dioxide are by-products of the coal burning process, the new factors of SO2 and CO2 emissions allowances come into play in a carbon constrained economy. Now that a price has been put on such allowances, the differences in carbon intensity for coal and gas could potentially change the way companies run their power plants. Moreover, knowledge of the statistical distribution of emission trading allowances, and its forecastability, becomes crucial in constructing optimal hedging and purchasing strategies in the carbon market. This paper provides an in-depth analysis of available data addressing the unconditional tail behavior and the inherent heteroskedastic dynamics in the returns on the emissions allowances.
    Keywords: Environmental Finance, GARCH, Greenhouse Gases, Mixture Models, Tail Estimation
    JEL: C16 C32 C51 C52 C53
    Date: 2006–11
  25. By: Tol, Richard S.J.
    Abstract: 211 estimates of the social cost of carbon are included in a meta-analysis. The results confirm that a lower discount rate implies a higher estimate; and that higher estimates are found in the gray literature. It is also found that there is a downward trend in the economic impact estimates of the climate; that the Stern Review’s estimates of the social cost of carbon is an outlier; and that the right tail of the distribution is fat. There is a fair chance that the annual climate liability exceeds the annual income of many people.
    Keywords: Climate change, social cost of carbon
    JEL: Q54
    Date: 2007
  26. By: Martin Weitzman
    Abstract: Using climate change as a prototype motivating example, this paper analyzes the implications of structural uncertainty for the economics of low-probability high-impact catastrophes. The paper shows that having an uncertain multiplicative parameter, which scales or amplifies exogenous shocks and is updated by Bayesian learning, induces a critical "tail fattening" of posterior-predictive distributions. These fattened tails can have strong implications for situations (like climate change) where a catastrophe is theoretically possible because prior knowledge cannot place sufficiently narrow bounds on overall damages. The essence of the problem is the difficulty of learning extreme-impact tail behavior from finite data alone. At least potentially, the influence on cost-benefit analysis of fat-tailed uncertainty about the scale of damages -- coupled with a high value of statistical life -- can outweigh the influence of discounting or anything else.
    JEL: Q54
    Date: 2007–10

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