Risk and Return in Environmental Economics
12:00 - 13:30
Environmental policy imposes social costs, but with the intent of yielding social returns, often over a long period of time. Like other private or public investments, that return is uncertain. But unlike most investments, the uncertainty is complex and is often the objective of the policy itself. Climate change is a good example: it has a very long time horizon and considerable uncertainty over social benefits from abatement. I compare the expected returns from abatement to the variance of those returns, and thereby characterize the risk-return tradeoff for environmental investments. I use "willingness to pay" (WTP) as a welfare measure that describes the social demand for abatement, and show how that demand depends on expected outcomes versus outcome uncertainty. I construct "iso-WTP curves," i.e., social indifference curves that describe welfare-equivalent tradeoffs between risk and return. Given the cost of reducing, say, expected future temperature increases and/or the variance of temperature increases, one can then determine the welfare-maximizing combination of risk and return for policy outcomes.