{"id":1612,"date":"2026-05-31T11:40:30","date_gmt":"2026-05-31T11:40:30","guid":{"rendered":"http:\/\/christoph-hambel.de\/?p=1612"},"modified":"2026-05-31T11:50:18","modified_gmt":"2026-05-31T11:50:18","slug":"new-working-paper-3","status":"publish","type":"post","link":"http:\/\/christoph-hambel.de\/?p=1612","title":{"rendered":"New Working Paper"},"content":{"rendered":"\n<p class=\"wp-block-paragraph\"><a href=\"https:\/\/rickvanderploeg.wordpress.com\/\">Rick <\/a>and I have written a brief note that relates our recent QE publication <em>Three Reasons to Price Carbon: Accuracy of Simple Rules<\/em> (<a href=\"http:\/\/christoph-hambel.de\/wp-admin\/post.php?post=1480&action=edit\">link<\/a>) to the Martin Weitzman\u2019s Dismal Theorem. Weitzman (2009) shows that under fat-tailed uncertainty about climate damages and CRRA utility, expected utility and expected marginal utility may be infinite, rendering cost-benefit analysis inapplicable.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">This note revisits the Dismal Theorem in the light of climate-related disasters in a general equilibrium production economy with recursive preferences, endogenous growth, temperature-dependent disaster risk, and a growth rate impact of warming on capital accumulation. If the climate disaster loss distribution is sufficiently fat-tailed, the risk-adjusted expected loss term diverges. Under unit elasticity of intertemporal substitution (EIS), this causes the social cost of carbon (SCC) to explode and the underlying<br>optimization problem to have no finite solution so that the dynamic general equilibrium analogue of the dismal theorem applies. We suggest that, if the expected size of damages also increases with temperature or due to climate tipping points, the fat tail becomes endogenous and the dismal mechanism is more likely to be activated at higher temperatures.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The policy implications of this mechanism are substantial: If the climate disaster loss distribution is fat-tailed, it is infinite, and it is optimal to abolish fossil fuels and switch immediately to renewable energy. We also show tha taking the second moments into account is not sufficient to detect the dismal mechanism, which requires estimating the tail behavior of the disaster distribution, i.e., the region where observed data on climate disaster losses are scarcest. This echoes Weitzman (2009)\u2019s original argument that fat-tail behavior can never be fully learned away from finite data.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The paper can be found <a href=\"http:\/\/christoph-hambel.de\/wp-content\/uploads\/2026\/05\/Dismal_Theorem_HvdP-2026.pdf\">here<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Rick and I have written a brief note that relates our recent QE publication Three Reasons to Price Carbon: Accuracy of Simple Rules (link) to the Martin Weitzman\u2019s Dismal Theorem. Weitzman (2009) shows that under fat-tailed uncertainty about climate damages and CRRA utility, expected utility and expected marginal utility may be infinite, rendering cost-benefit analysis inapplicable. This note revisits the [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":748,"comment_status":"closed","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[4],"tags":[],"class_list":["post-1612","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-research","col-lg-4 col-md-6"],"_links":{"self":[{"href":"http:\/\/christoph-hambel.de\/index.php?rest_route=\/wp\/v2\/posts\/1612","targetHints":{"allow":["GET"]}}],"collection":[{"href":"http:\/\/christoph-hambel.de\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/christoph-hambel.de\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/christoph-hambel.de\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/christoph-hambel.de\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1612"}],"version-history":[{"count":6,"href":"http:\/\/christoph-hambel.de\/index.php?rest_route=\/wp\/v2\/posts\/1612\/revisions"}],"predecessor-version":[{"id":1618,"href":"http:\/\/christoph-hambel.de\/index.php?rest_route=\/wp\/v2\/posts\/1612\/revisions\/1618"}],"wp:featuredmedia":[{"embeddable":true,"href":"http:\/\/christoph-hambel.de\/index.php?rest_route=\/wp\/v2\/media\/748"}],"wp:attachment":[{"href":"http:\/\/christoph-hambel.de\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1612"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/christoph-hambel.de\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1612"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/christoph-hambel.de\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1612"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}