Accounting for the risk of extreme outcomes in an integrated assessment of climate change
AbstractThe potential for climate catastrophes, represented by 'fat-tailed' distributions on consequences, has attracted much attention recently. To date, however, most integrated assessment models have either been largely deterministic or deterministic with ex-post sensitivity analysis. The conclusions of such analyses are likely to differ from those employing models that accurately characterize society's joint preferences concerning time and risk, especially when distributions are fat-tailed. Using a dynamic stochastic general equilibrium model adapted from Nordhaus's DICE model, we show that failing to accurately account for risk can lead to substantial underestimation of the net benefits of greenhouse gas abatement. A robust finding of our analysis is that a lenient 'policy ramp' emissions reduction strategy is preferable over a more aggressive strategy--such as that advocated by the Stern Review--only if the model does not account for uncertainty about the climate system, the carbon cycle and economic damages, and specifies a consumption discount rate that is counterfactually higher than the historical global weighted average cost of capital of 4.0%. In the debate over uncertainty and time discounting, our results imply that what matters most in climate change assessment is the inclusion and particular specification of uncertainty rather than the precise choice of discount rate.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Energy Policy.
Volume (Year): 38 (2010)
Issue (Month): 8 (August)
Contact details of provider:
Web page: http://www.elsevier.com/locate/enpol
Uncertainty Cost-benefit analysis Climate change;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Martin L. Weitzman, 2007. "A Review of the Stern Review on the Economics of Climate Change," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 703-724, September.
- Altug,Sumru & Labadie,Pamela, 2008.
"Asset Pricing for Dynamic Economies,"
Cambridge University Press, number 9780521875851, October.
- Stephen Newbold & Adam Daigneault, 2009. "Climate Response Uncertainty and the Benefits of Greenhouse Gas Emissions Reductions," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 44(3), pages 351-377, November.
- Manne, Alan & Mendelsohn, Robert & Richels, Richard, 1995. "MERGE : A model for evaluating regional and global effects of GHG reduction policies," Energy Policy, Elsevier, vol. 23(1), pages 17-34, January.
- Richard B. Howarth, 2009. "Discounting, Uncertainty, and Revealed Time Preference," Land Economics, University of Wisconsin Press, vol. 85(1), pages 24-40.
- Lorraine Hamid & Nicholas Stern & Chris Taylor, 2007. "REFLECTIONS ON THE STERN REVIEW (2) A Growing International Opportunity to Move Strongly on Climate Change," World Economics, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 8(1), pages 169-186, January.
- Richard S. J. Tol & Gary W. Yohe, 2007. "A Stern Reply to the Reply to the Review of the Stern Review," World Economics, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 8(2), pages 153-159, April.
- Richard S. J. Tol & Gary W. Yohe, 2006. "A Review of the Stern Review," World Economics, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 7(4), pages 233-250, October.
- Richard T. Woodward & Richard C. Bishop, 1997. "How to Decide When Experts Disagree: Uncertainty-Based Choice Rules in Environmental Policy," Land Economics, University of Wisconsin Press, vol. 73(4), pages 492-507.
- Adam Daigneault & Steve Newbold, 2009. "Climate Response Uncertainty and the Unexpected Benefits of Greenhouse Gas Emissions Reductions," NCEE Working Paper Series 200806, National Center for Environmental Economics, U.S. Environmental Protection Agency, revised Mar 2009.
- Simon Dietz & Chris Hope & Nicholas Stern & Dimitri Zenghelis, 2007. "REFLECTIONS ON THE STERN REVIEW (1) A Robust Case for Strong Action to Reduce the Risks of Climate Change," World Economics, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 8(1), pages 121-168, January.
- Roughgarden, Tim & Schneider, Stephen H., 1999. "Climate change policy: quantifying uncertainties for damages and optimal carbon taxes," Energy Policy, Elsevier, vol. 27(7), pages 415-429, July.
- Robert Mendelsohn, 2008. "Is the Stern Review an Economic Analysis?," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 2(1), pages 45-60, Winter.
- Kousky, Carolyn & Kopp, Robert E. & Cooke, Roger, 2011. "Risk premia and the social cost of carbon: A review," Economics Discussion Papers 2011-19, Kiel Institute for the World Economy.
- Mort Webster & Nidhi Santen & Panos Parpas, 2012. "An approximate dynamic programming framework for modeling global climate policy under decision-dependent uncertainty," Computational Management Science, Springer, vol. 9(3), pages 339-362, August.
- Gren, Ing-Marie & Carlsson, Mattias & Elofsson, Katarina & Munnich, Miriam, 2012. "Stochastic carbon sinks for combating carbon dioxide emissions in the EU," Energy Economics, Elsevier, vol. 34(5), pages 1523-1531.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.