The Aggregation Dilemma
AbstractThe results in this paper show that the level of aggregation used in a social welfare func- tion matters significantly for policy analysis. Using climate change as an example, it is shown that, under the mild and widely-accepted assumptions of asymmetric climate change impacts and declining marginal utility, an aggregation dilemma may arise that dwarfs most other policy-relevant aspects in the climate change cost-benefit analysis. Estimates based on the RICE-99 model (Nordhaus and Boyer 2000) suggest that aggregation leads to around 26% higher total world emissions than those from a regional model. The backstop energy use would be zero in the model which aggregates consumption in utility, while it would be 1.3% of Gross World Product in a regionally-disaggregated version. In general we observe that richer countries will be required to undertake stronger efforts toward climate policy based on the aggregated utility social welfare function and compared to both the aggregated utility function with Negishi weights and the aggregated consumption function. We propose criteria that may aid in deciding on the level of aggregation one might wish to choose de- pending on both positive and normative criteria. Though the policy recommendations from fully aggregated models like the DICE model are always used as a benchmark for policy making, the results here suggest that this should be done with the reservations raised by the Aggregation Dilemma in mind.
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Bibliographic InfoPaper provided by Department of Research, Ipag Business School in its series Working Papers with number 2014-224.
Length: 31 pages
Date of creation: 10 Apr 2014
Date of revision:
Aggregation Dilemma; social welfare function; Integrated Assessment Models; climate policy.;
Find related papers by JEL classification:
- Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters
- Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-04-18 (All new papers)
- NEP-ENE-2014-04-18 (Energy Economics)
- NEP-ENV-2014-04-18 (Environmental Economics)
- NEP-UPT-2014-04-18 (Utility Models & Prospect Theory)
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