What is the Damages Functionfor Global Warming and What Di¤erence Might It Make?

The existing literature on climate change o¤ers little guidance about why one speci…cation or another of a “damages function”has been selected. Ideally, one wants a functional form that captures reality adequately, yet analytically is su¢ ciently tractable to yield useful results. This paper gives two plausible risk aversion axioms that a reduced form utility function of temperature change and the capacity to produce consumption might reasonably be required to satisfy. These axioms indicate that the standard practice multiplicative speci…cation of disutility damages from global warming, as well as its additive analogue, are special cases of this paper’s theoretically-derived utility function. Empirically, the paper gives some numerical examples demonstrating the surprisingly strong implications for economic policy of the distinction between additive and multiplicative disutility damages.