the costs related to the climate change. They will be borne by future generations. Thus the impossibility of Coasian
bargaining solution (Calabresi and Melamed 1971; Coase 1960) rests not so much on high transaction costs and
information problems, rather the fundamental problem is that there is no-one to contract with in the first place—as
those should ultimately bear the costs are not (yet) alive. As a result, the nature as well as the magnitude of these
costs is more speculative.
More specifically, the uncertainty has three sources: (i) the uncertainty related to prediction of climate decades
from now, as well as the size of the causal effect of human activity in that; (ii) the uncertainty in estimating the future
costs as well as future resources, technology, and the ability of future societies to cope with those costs—as
opposed of today's actions; and (iii) the discount rate that should be applied to those costs, which is necessary in
order determine the appropriate amount of today's investments into the preventive measures—as opposed to compensating
the future generations (Pearce 2003; Pindyck 2013a,b; Schelling 2007, 2009; see also Tol 2012). However,
the uncertainty does not imply that there should be no policy response. In addition, even if mean predictions of
future costs due to climate change were zero, there is a risk of a catastrophic outcome, which calls for a policy response
(Pindyck 2013a,b; Pindyck and Wang 2013; Posner 2005; Weitzman 2007).1 Thus, we do not discuss the
explicit value of the carbon dioxide-related externalities generated by motor vehicles, rather we treat that externality
as a cost and study policies that would lead consumers to choose the socially optimal amount of it.