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Building Risk into the Mitigation/Adaptation Decisions simulated by Integrated Assessment Models

Author

Listed:
  • Anil Markandya

    (Scientific Campus of the University of the Basque Country)

  • Enrica Cian

    (University of Venice Ca’ Foscari
    Fondazione Euro-Mediterranean Center on Climate Change)

  • Laurent Drouet

    (Fondazione Euro-Mediterranean Center on Climate Change)

  • Josué M. Polanco-Martínez

    (Scientific Campus of the University of the Basque Country
    University of Bordeaux)

  • Francesco Bosello

    () (Fondazione Euro-Mediterranean Center on Climate Change
    University of Milan)

Abstract

This paper proposes an operationally simple and easily generalizable methodology to incorporate climate change damage uncertainty into Integrated Assessment Models (IAMs). First uncertainty is transformed into a risk measure by extracting damage distribution means and variances from an ensemble of socio economic and climate change scenarios. Then a risk premium is computed under different degrees of risk aversion, quantifying what society would be willing to pay to insure against the uncertainty of the damages. Our estimates show that the premium for the risk is a potentially significant addition to the “standard average damage”, but highly sensitive to the attitudes toward risk. In the last research phase, the risk premium is incorporated into the climate change damage function of a widely used IAM which shows, consequently, a substantial increase in both mitigation and adaptation efforts, reflecting a more precautionary attitude by the social planner. Interestingly, adaptation is stimulated more than mitigation in the first half of this century, while the situation reverses afterwards.

Suggested Citation

  • Anil Markandya & Enrica Cian & Laurent Drouet & Josué M. Polanco-Martínez & Francesco Bosello, 2019. "Building Risk into the Mitigation/Adaptation Decisions simulated by Integrated Assessment Models," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 74(4), pages 1687-1721, December.
  • Handle: RePEc:kap:enreec:v:74:y:2019:i:4:d:10.1007_s10640-019-00384-1
    DOI: 10.1007/s10640-019-00384-1
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    More about this item

    Keywords

    Risk; Uncertainty; Climate change damages; Adaptation; Mitigation;
    All these keywords.

    JEL classification:

    • Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation
    • Q3 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • D62 - Microeconomics - - Welfare Economics - - - Externalities

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