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Is the Uncertainty about Climate Change Too Large for Expected Cost-Benefit Analysis?

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  • Richard S.J. Tol

    (Economic and Social Research Institute, Dublin)

Abstract

Cost-benefit analysis is only applicable if the variances of both costs and benefits are finite. In the case of climate change, the variances of the net present marginal costs and benefits of greenhouse gas emission reduction need to be finite. Finiteness is hard, if not impossible to prove. The opposite is easier to establish as one needs to shows that there is one, not impossible representation of the climate change with infinite variance. The paper shows that all relevant current variables of the FUND model have finite variances. However, there is a small chance that climate change reverses economic growth in some regions. In that case, the discount rate becomes negative and the net present marginal benefits of greenhouse gas emission reduction becomes very large. So large, that its variance is unbounded.

Suggested Citation

  • Richard S.J. Tol, 2000. "Is the Uncertainty about Climate Change Too Large for Expected Cost-Benefit Analysis?," Working Papers FNU-3, Research unit Sustainability and Global Change, Hamburg University, revised Sep 2000.
    • Handle: RePEc:sgc:wpaper:3
    as

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    File URL: http://www.fnu.zmaw.de/fileadmin/fnu-files/publication/working-papers/maxuncertain1.pdf
    File Function: First version, 2000
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    References listed on IDEAS

    as
    1. Kolstad, Charles D., 1996. "Learning and Stock Effects in Environmental Regulation: The Case of Greenhouse Gas Emissions," Journal of Environmental Economics and Management, Elsevier, vol. 31(1), pages 1-18, July.
    2. 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.
    3. Samuel Fankhauser & Richard Tol & DAVID Pearce, 1997. "The Aggregation of Climate Change Damages: a Welfare Theoretic Approach," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 10(3), pages 249-266, October.
    4. Alan Manne & Richard Richels, 1995. "The Greenhouse Debate: Econonmic Efficiency, Burden Sharing and Hedging Strategies," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 1-38.
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    Citations

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    Cited by:

    1. Anda, Jon & Golub, Alexander & Strukova, Elena, 2009. "Economics of climate change under uncertainty: Benefits of flexibility," Energy Policy, Elsevier, vol. 37(4), pages 1345-1355, April.
    2. Martin L. Weitzman, 2009. "On Modeling and Interpreting the Economics of Catastrophic Climate Change," The Review of Economics and Statistics, MIT Press, vol. 91(1), pages 1-19, February.
    3. Scott, Susan & Watson, Dorothy, 2009. "Cost-benefit Analysis of the Introduction of Weight-based Charges for Domestic Waste ? West Cork's Experience," Papers WP335, Economic and Social Research Institute (ESRI).
    4. In Chang Hwang & Richard S.J. Tol & Marjan W. Hofkes, 2013. "Tail-effect and the Role of Greenhouse Gas Emissions Control," Working Paper Series 6613, Department of Economics, University of Sussex Business School.
    5. Richard S. J. Tol, 2009. "The Economic Effects of Climate Change," Journal of Economic Perspectives, American Economic Association, vol. 23(2), pages 29-51, Spring.
    6. Martin Weitzman, 2007. "Structural Uncertainty and the Value of Statistical Life in the Economics of Catastrophic Climate Change," NBER Working Papers 13490, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    Climate change; cost-benefit analysis; uncertainty;
    All these keywords.

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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