Risk and return in environmental economics

Risk and return in environmental economics / Robert S. Pindyck. MIT CEEPR, July 2012, 41 p. (Working paper ; n° 012-010)


I examine the risk/return tradeoff for environmental investments, and its implications for policy choice. Consider a policy to reduce carbon emissions. To what extent does the value of such a policy depend on the expected future damages from global warming versus uncertainty over those damages, i.e., on the expected benefits from the policy versus their riskiness? And to what extent should the policy objective be a reduction in the expected temperature increase versus a reduction in risk? Using a simple model of a stock externality (e.g., temperature) that evolves stochastically, I examine the “willingness to pay” (WTP) for alternative policies that would reduce the expected damages under “business as usual” (BAU) versus the variance of those damages. I also show how one can compute “iso-WTP” curves (social indifference curves) for combinations of risk and expected returns as policy objectives. Given cost estimates for reducing risk and increasing expected returns, one can compute the optimal risk-return mix for a policy, and the policy’s social surplus. I illustrate these results by calibrating the model to data for global warming.(© Pindyck)

Vous aimerez aussi...

Laisser un commentaire

Votre adresse e-mail ne sera pas publiée.

Ce site utilise Akismet pour réduire les indésirables. En savoir plus sur comment les données de vos commentaires sont utilisées.

Rechercher dans OpenEdition Search

Vous allez être redirigé vers OpenEdition Search