Risk and Return in Environmental Economics
I examine risk/return trade-offs for environmental investments and their implications for policy choice. Consider a policy to reduce carbon emissions. 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...
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| Format: | Article |
| Language: | en_US |
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University of Chicago Press
2015
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| Online Access: | http://hdl.handle.net/1721.1/99116 https://orcid.org/0000-0001-8296-9875 |
| _version_ | 1811088645279449088 |
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| author | Pindyck, Robert S. |
| author2 | Sloan School of Management |
| author_facet | Sloan School of Management Pindyck, Robert S. |
| author_sort | Pindyck, Robert S. |
| collection | MIT |
| description | I examine risk/return trade-offs for environmental investments and their implications for policy choice. Consider a policy to reduce carbon emissions. 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 that evolves stochastically, I examine the “willingness to pay” (WTP) for alternative policies that would reduce expected damages versus the variance of those damages. I compute “iso-WTP” curves (social indifference curves) for combinations of risk and expected return 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. |
| first_indexed | 2024-09-23T14:05:16Z |
| format | Article |
| id | mit-1721.1/99116 |
| institution | Massachusetts Institute of Technology |
| language | en_US |
| last_indexed | 2024-09-23T14:05:16Z |
| publishDate | 2015 |
| publisher | University of Chicago Press |
| record_format | dspace |
| spelling | mit-1721.1/991162022-10-01T19:06:40Z Risk and Return in Environmental Economics Risk and Return in the Design of Environmental Policy Pindyck, Robert S. Sloan School of Management Pindyck, Robert S. I examine risk/return trade-offs for environmental investments and their implications for policy choice. Consider a policy to reduce carbon emissions. 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 that evolves stochastically, I examine the “willingness to pay” (WTP) for alternative policies that would reduce expected damages versus the variance of those damages. I compute “iso-WTP” curves (social indifference curves) for combinations of risk and expected return 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. 2015-10-01T11:59:06Z 2015-10-01T11:59:06Z 2014-09 2013-11 Article http://purl.org/eprint/type/JournalArticle 23335955 23335963 http://hdl.handle.net/1721.1/99116 Pindyck, Robert S. “Risk and Return in the Design of Environmental Policy.” Journal of the Association of Environmental and Resource Economists 1, no. 3 (September 2014): 395–418. https://orcid.org/0000-0001-8296-9875 en_US http://dx.doi.org/10.1086/677949 Journal of the Association of Environmental and Resource Economists Creative Commons Attribution-Noncommercial-Share Alike http://creativecommons.org/licenses/by-nc-sa/4.0/ application/pdf University of Chicago Press MIT web domain |
| spellingShingle | Pindyck, Robert S. Risk and Return in Environmental Economics |
| title | Risk and Return in Environmental Economics |
| title_full | Risk and Return in Environmental Economics |
| title_fullStr | Risk and Return in Environmental Economics |
| title_full_unstemmed | Risk and Return in Environmental Economics |
| title_short | Risk and Return in Environmental Economics |
| title_sort | risk and return in environmental economics |
| url | http://hdl.handle.net/1721.1/99116 https://orcid.org/0000-0001-8296-9875 |
| work_keys_str_mv | AT pindyckroberts riskandreturninenvironmentaleconomics AT pindyckroberts riskandreturninthedesignofenvironmentalpolicy |