Abstract—With climate change as prototype example, this paper analyzes the implications of structural uncertainty for the economics of lowprobability, high-impact catastrophes. Even when updated by Bayesian learning, uncertain structural parameters induce a critical “tail fattening” of posterior-predictive distributions. Such fattened tails have strong implications for situations, like climate change, where a catastrophe is theoretically possible because prior knowledge cannot place sufficiently narrow bounds on overall damages. This paper shows that the economic consequences of fat-tailed structural uncertainty (along with unsureness about high-temperature damages) can readily outweigh the effects of discounting in climate-change policy analysis. I.

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Some risks have extremely high stakes. For example, a worldwide pandemic or asteroid impact could potentially kill more than a billion people. Comfortingly, scientific calculations often put very low probabilities on the occurrence of such catastrophes. In this paper, we argue that there are important new methodological problems which arise when assessing global catastrophic risks and we focus on a problem regarding probability estimation. When an expert provides a calculation of the probability of an outcome, they are really providing the probability of the outcome occurring, given that their argument is watertight. However, their argument may fail for a number of reasons such as a flaw in the underlying theory, a flaw in the modeling of the problem, or a mistake in the calculations. If the probability estimate given by an argument is dwarfed by the chance that the argument itself is flawed, then the estimate is suspect. We develop this idea formally, explaining how it differs from the related distinctions of model and parameter uncertainty. Using the risk estimates from the Large Hadron Collider as a test case, we show how serious the problem can be when it comes to catastrophic risks and how best to address it. 1.

Humans have slowly built more productive societies by slowly acquiring various kinds of capital, and by carefully matching them to each other. Because disruptions can disturb this careful matching, and discourage social coordination, large disruptions can cause a “social collapse, ” i.e., a reduction in productivity out of proportion to the disruption. For many types of disasters, severity seems to follow a power law distribution. For some of types, such as wars and earthquakes, most of the expected harm is predicted to occur in extreme events, which kill most people on Earth. So if we are willing to worry about any war or earthquake, we should worry especially about extreme versions. If individuals varied little in their resistance to such disruptions, events a little stronger than extreme ones would eliminate humanity, and our only hope would be to prevent such events. If individuals vary a lot in their resistance, however, then it may pay to increase the variance in such resistance, such as by creating special sanctuaries from which the few remaining humans could rebuild society.

There is a low but uncertain probability that climate change could trigger “mega-catastrophes,” severe and at least partly irreversible adverse effects across broad regions. This paper first discusses the state of current knowledge and the defining characteristics of potential climate change mega-catastrophes. While some of these characteristics present difficulties for using standard rational choice methods to evaluate response options, there is still a need to balance benefits and costs of different possible responses with appropriate attention to the uncertainties. To that end, we present a qualitative analysis of three options for mitigating the risk of climate mega-catastrophes—drastic abatement of greenhouse gas emissions, development and implementation of geo-engineering, and large-scale ex-ante adaptation—against the criteria of efficacy, cost, robustness, and flexibility. We discuss the composition of a sound portfolio of initial investments in reducing the risk of climate change mega-catastrophes.

The asteroid and comet impact peril appears to be, in several respects, more momentous than environmental hazards such as global warming. Building on Gregory Canavan’s analysis that he derived from impact frequency data, an estimate in the order of $40 billion is obtainable as the present value of the risk from cosmic impactors. Presently contemplated strategies to reduce the human carnage from a large impactor instill little confidence. The present value of probability adjusted damage from extinction level impactors dwarfs the present value of potential losses from other environmental disasters when, as Martin Weitzman urges, the lowest possible discount rate is used for distant future losses. Separating extinction level threats from the ordinary analytics of risks in general also implies domination by the asteroid threat over threats such as the greenhouse effect from anthropogenic carbon dioxide. Declining performance in space launch activities accompanies productivity growth stagnation in the U.S. economy. Economic growth and technological progress seem most urgently mandated in response to cosmic collision fears that probably should gain greater priority relative to fear of greenhouse warming. The impact peril gains inadequate attention because it fails to offer the kind of rent seeking opportunities that abound from global warming fears.

2005), tells the dramatic decline of past civilizations—the Easter Islanders, the

The benefits of economic growth are widely touted in the literature. But what about the costs? Pollution, nuclear accidents, global warming, the rapid global transmission of disease, and bioengineered viruses are just some of the dangers created by technological change. How should these be weighed against the benefits, and in particular, how does the recognition of these costs affect the theory of economic growth? This paper shows that taking these costs into account has first-order consequences for economic growth. The rising value of life associated with standard utility functions generates a conservative bias to technological change, significantly slowing the optimal rate of economic growth. I am grateful to the National Science Foundation for financial support and to the Stanford GSB for hosting me during this research. 2 CHARLES I. JONES Certain events quite within the realm of possibility, such as a major asteroid collision, global bioterrorism, abrupt global warming — even certain lab accidents — could have unimaginably terrible consequences up to and including the extinction of the human race... I am not a Green, an alarmist, an apocalyptic visionary, a catastrophist, a Chicken Little, a Luddite, an anticapitalist, or even a pessimist. But... I have come to believe that what I shall be calling the “catastrophic risks ” are real and growing... — Richard A. Posner (2004, p. v) 1.

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RICHARD POSNER IS WIDELY described as a libertarian, 1 but as many of this journal’s readers likely know, this is not true. 2 And the latest of his many books, Catastrophe: Risk and Response, may be his most statist work yet, for it wants nothing more than to scare you into accepting bigger, ever-more-powerful government. It is part of a stream of recent work from University of Chicago court intellectuals advocating bigger government and explicitly attacking those who warn against trading liberty for security. 3 The book looks at several interesting-but-unlikely catastrophic scenarios in which millions of humans could be killed. And its proposal for avoiding each one is more power for the state. All the while, however, Posner overlooks the critical fact that the state poses the greatest danger of all to human life—and is responsible for many of the catastrophic risks he analyzes. CATASTROPHE! In his first chapter, Judge Posner describes a number of scenarios under which a catastrophe could kill many, most, or all of us. This is the best part of the book, because some of these disasters are so outrageously unlikely and unfathomable, and Posner so clearly enjoys describing them in graphic detail. Indeed, not since The Hitchhiker’s Guide to the Galaxy has an author appeared to have so much fun wiping out humanity. Four catastrophes in particular get extensive attention: asteroid collisions, scientific accidents, global warming, and bioterrorism. The first disaster discussed is an asteroid collision, described as follows: 1He has even called himself one (Kurtz 2001).