What modifications are needed to analyze catastrophic economic risks in an integrated assessment model?

The problem of low-probability, catastrophic risk is increasingly central to discussion of climate science and policy, but integrated assessment models (IAMs) in climate economics rarely incorporate this possibility.

What would it take to change this? We explore the question using DICE, a well-known IAM, examining the implications of a fat-tailed probability distribution for the climate sensitivity parameter, a focus of recent work by Martin Weitzman, and the shape of the damage function, one of the issues raised by the Stern Review.

An earlier version of this article appeared as SEI Working Paper WP-US-0901, February/May 2009.

Read the article online or email us for a copy.