Recursive intergenerational utility in global climate risk modeling.

Summary This paper investigates the difference between relative risk aversion and resistance to intertemporal substitution in climate risk modeling. Stochastic recursive preferences are used in a stylized numerical model using preliminary ICCS 1998 scenarios on the economy and climate. It is shown that higher risk aversion leads to an increase in the optimal level of energy taxation. Increasing the resistance to intertemporal substitution has the same effect as increasing the discount rate, as long as the risk is not too great. The implications of these results for the debate on discounting and sustainability under uncertainty are discussed.