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A quantitative minimax regret approach to climate change: Does discounting still matter?

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  • Hof, Andries F.
  • van Vuuren, Detlef P.
  • den Elzen, Michel G.J.
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    Abstract

    Using cost-benefit analysis to determine an optimal climate mitigation target is criticised, especially because i) it fails to sufficiently take into account low-probability, high-impact events, and ii) results strongly depend on the discount rate used. One of the alternative suggestions to inform policymakers about the right mitigation target that does take the risks associated with low-probability, high-impact events explicitly into account is the minimax regret criterion. We apply the minimax regret criterion quantitatively using an integrated assessment model with extreme values for climate sensitivity, damage estimates and mitigation costs. The goal is to analyse whether such a method leads to different results compared to standard cost-benefit analysis and whether the results are still sensitive to the discount rate used. We find that the minimax regret approach leads to more stringent and robust climate targets for relatively low discount rates and if both a high climate sensitivity and high damage estimates are assumed. If one of these assumptions does not hold, the difference between the minimax regret approach and standard cost-benefit analysis is much smaller. Therefore, we conclude that the discount rate used can still be of vital importance even when applying a minimax regret approach.

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    Bibliographic Info

    Article provided by Elsevier in its journal Ecological Economics.

    Volume (Year): 70 (2010)
    Issue (Month): 1 (November)
    Pages: 43-51

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    Handle: RePEc:eee:ecolec:v:70:y:2010:i:1:p:43-51

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    Web page: http://www.elsevier.com/locate/ecolecon

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    Keywords: Climate change Cost-benefit analysis Risk approach Minimax regret Precautionary principle;

    References

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    2. Weitzman, Martin L., 2009. "On Modeling and Interpreting the Economics of Catastrophic Climate Change," Scholarly Articles 3693423, Harvard University Department of Economics.
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    Cited by:
    1. W. Botzen & Jeroen Bergh, 2014. "Specifications of Social Welfare in Economic Studies of Climate Policy: Overview of Criteria and Related Policy Insights," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 58(1), pages 1-33, May.
    2. Iverson, Terrence, 2013. "Minimax regret discounting," Journal of Environmental Economics and Management, Elsevier, vol. 66(3), pages 598-608.

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