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Abstract:
We highlight that uncertainty about climate damages and the fact that damages will be distributed heterogeneously across the global population
can jointly be an argument for substantially stricter climate policy
even if uncertainty and heterogeneity in isolation are not. The reason
is that a given climate risk borne by fewer people implies greater
welfare losses. However, these losses turn out to be significant only if
society is both risk and inequality averse and if climate damages are
highly heterogeneous. We discuss how insurance and self-insurance of
climate risk could theoretically mitigate this joint effect of
uncertainty and heterogeneity and thus admit weaker climate policy.
Insurance provides more efficient risk sharing and self-insurance allows
strongly impacted individuals to compensate damages by increasing
savings. We first use a simple analytical model to introduce the
different concepts and then provide more realistic results from the
integrated assessment model DICE.
