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06-07 “The Economics of Inaction on Climate Change: A Sensitivity Analysis”

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  • Frank Ackerman
  • Ian J. Finlayson

Abstract

Economic models of climate change often take the problem seriously, but paradoxically conclude that the optimal policy is to do almost nothing about it. We explore this paradox as seen in the widely used DICE model. Three aspects of that model, involving the discount rate, the assumed benefits of moderate warming, and the treatment of the latest climate science, are sufficient to explain the timidity of the model's optimal policy recommendation. With modifications to those three points, DICE shows that the optimal policy is a much higher and rapidly rising marginal carbon price; that higher carbon price has a greater effect on physical measures of climate impacts. Our modifications exhibit nonlinear interactions; at least at low discount rates, there is synergy between individual changes to the model. At low discount rates, the inherent uncertainty about future damages looms larger in the analysis, rendering long-run economic modeling less useful. Our analysis highlights the sensitivity of the model to three debatable assumptions; it does not, and could not, lead to a more reliably “optimal” cost of carbon. Cost-effectiveness analysis, focusing on the generally shorter-term cost side of the problem, reduces the economic paradoxes of the long run, and may make a greater contribution than economic optimization modeling.

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Paper provided by GDAE, Tufts University in its series GDAE Working Papers with number 06-07.

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Handle: RePEc:dae:daepap:06-07

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  1. Minh Ha-Duong & Nicolas Treich, 2004. "Risk Aversion, Intergenerational Equity and Climate Change," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 28(2), pages 195-207, June.
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  9. Hall, Darwin C. & Behl, Richard J., 2006. "Integrating economic analysis and the science of climate instability," Ecological Economics, Elsevier, vol. 57(3), pages 442-465, May.
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Cited by:
  1. Frank Ackerman and Elizabeth Stanton, . "06-05 Can Climate Change Save Lives? A comment on “Economy-wide estimates of the implications of climate change: Human health”," GDAE Working Papers 06-05, GDAE, Tufts University.
  2. Brian Roach, . "08-03 "Policies for Funding a Response to Climate Change"," GDAE Working Papers 08-03, GDAE, Tufts University.
  3. Julie A. Nelson, 2011. "11-02 "Ethics and the Economist: What Climate Change Demands of Us"," GDAE Working Papers 11-02, GDAE, Tufts University.

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