IDEAS home Printed from https://ideas.repec.org/a/eee/enepol/v38y2010i8p4540-4548.html
   My bibliography  Save this article

Accounting for the risk of extreme outcomes in an integrated assessment of climate change

Author

Listed:
  • Gerst, Michael D.
  • Howarth, Richard B.
  • Borsuk, Mark E.

Abstract

The 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.

Suggested Citation

  • Gerst, Michael D. & Howarth, Richard B. & Borsuk, Mark E., 2010. "Accounting for the risk of extreme outcomes in an integrated assessment of climate change," Energy Policy, Elsevier, vol. 38(8), pages 4540-4548, August.
  • Handle: RePEc:eee:enepol:v:38:y:2010:i:8:p:4540-4548
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0301-4215(10)00281-8
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. 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.
    2. Altug,Sumru & Labadie,Pamela, 2008. "Asset Pricing for Dynamic Economies," Cambridge Books, Cambridge University Press, number 9780521875851, January.
    3. 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.
    4. 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, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 8(1), pages 121-168, January.
    5. Stephen Newbold & Adam Daigneault, 2009. "Climate Response Uncertainty and the Benefits of Greenhouse Gas Emissions Reductions," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 44(3), pages 351-377, November.
    6. 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, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 8(1), pages 169-186, January.
    7. 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.
    8. Richard B. Howarth, 2009. "Discounting, Uncertainty, and Revealed Time Preference," Land Economics, University of Wisconsin Press, vol. 85(1), pages 24-40.
    9. Richard S. J. Tol & Gary W. Yohe, 2006. "A Review of the Stern Review," World Economics, World Economics, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 7(4), pages 233-250, October.
    10. 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.
    11. 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, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 8(2), pages 153-159, April.
    12. 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.
    13. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Lamperti, F. & Dosi, G. & Napoletano, M. & Roventini, A. & Sapio, A., 2018. "Faraway, So Close: Coupled Climate and Economic Dynamics in an Agent-based Integrated Assessment Model," Ecological Economics, Elsevier, vol. 150(C), pages 315-339.
    2. Toman, Michael, 2014. "The need for multiple types of information to inform climate change assessment," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 5(03), pages 469-485, December.
    3. 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.
    4. Kousky, Carolyn & Kopp, Robert E. & Cooke, Roger M., 2011. "Risk premia and the social cost of carbon: A review," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 5, pages 1-24.
    5. Soheil Shayegh & Valerie Thomas, 2015. "Adaptive stochastic integrated assessment modeling of optimal greenhouse gas emission reductions," Climatic Change, Springer, vol. 128(1), pages 1-15, January.
    6. repec:spr:grdene:v:24:y:2015:i:5:d:10.1007_s10726-014-9419-1 is not listed on IDEAS
    7. 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.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:enepol:v:38:y:2010:i:8:p:4540-4548. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/enpol .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.