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Building Uncertainty into the Adaptation Cost Estimation in Integrated Assessment Models

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Listed:
  • Markandya, Anil
  • De Cian, Enrica
  • Drouet, Laurent
  • Polanco-Martìnez, Josué M.
  • Bosello, Francesco

Abstract

This paper proposes an operationally simple and easily generalizable methodology to incorporate climate change damage uncertainty into Integrated Assessment Models (IAMs). Uncertainty is transformed into a risk-premium, damage-correction, region-specific factor by extracting damage distribution means and variances from an ensemble of socio economic and climate change scenarios. This risk premium quantifies what society would be willing to pay to insure against the uncertainty of the damages, and it can be considered an add-up to the standard “average damage”. Our computations show the addition to be significant, but highly sensitive to the coefficient of relative risk aversion. Once the climate change damage function incorporates the risk premium into the model, results show a substantial increase in both mitigation and adaptation, reflecting a more conservative attitude by the social planner. Interestingly, adaptation is stimulated more than mitigation in the first half of the century, while the situation reverses afterwards. Over the century, the risk premium correction fosters more mitigation, which doubles, than adaptation, which rises by about 80%.

Suggested Citation

  • Markandya, Anil & De Cian, Enrica & Drouet, Laurent & Polanco-Martìnez, Josué M. & Bosello, Francesco, 2016. "Building Uncertainty into the Adaptation Cost Estimation in Integrated Assessment Models," EIA: Climate Change: Economic Impacts and Adaptation 232719, Fondazione Eni Enrico Mattei (FEEM).
  • Handle: RePEc:ags:feemei:232719
    DOI: 10.22004/ag.econ.232719
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    File URL: http://ageconsearch.umn.edu/record/232719/files/NDL2016-021.pdf
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    References listed on IDEAS

    as
    1. Levy, Haim, 1994. "Absolute and Relative Risk Aversion: An Experimental Study," Journal of Risk and Uncertainty, Springer, vol. 8(3), pages 289-307, May.
    2. Christian Gollier, 2008. "Discounting with fat-tailed economic growth," Journal of Risk and Uncertainty, Springer, vol. 37(2), pages 171-186, December.
    3. Layard, R. & Mayraz, G. & Nickell, S., 2008. "The marginal utility of income," Journal of Public Economics, Elsevier, vol. 92(8-9), pages 1846-1857, August.
    4. Louis Kaplow, 2005. "The Value of a Statistical Life and the Coefficient of Relative Risk Aversion," Journal of Risk and Uncertainty, Springer, vol. 31(1), pages 23-34, July.
    5. J. Refsgaard & K. Arnbjerg-Nielsen & M. Drews & K. Halsnæs & E. Jeppesen & H. Madsen & A. Markandya & J. Olesen & J. Porter & J. Christensen, 2013. "The role of uncertainty in climate change adaptation strategies—A Danish water management example," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 18(3), pages 337-359, March.
    6. Gjerde, Jon & Grepperud, Sverre & Kverndokk, Snorre, 1999. "Optimal climate policy under the possibility of a catastrophe," Resource and Energy Economics, Elsevier, vol. 21(3-4), pages 289-317, August.
    7. Alan J. Krupnick & Anil Markandya & Eric Nickell, 1993. "The External Costs of Nuclear Power: Ex Ante Damages and Lay Risks," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 75(5), pages 1273-1279.
    8. Shardul Agrawala & Francesco Bosello & Carlo Carraro & Kelly De Bruin & Enrica De Cian & Rob Dellink & Elisa Lanzi, 2011. "Plan Or React? Analysis Of Adaptation Costs And Benefits Using Integrated Assessment Models," Climate Change Economics (CCE), World Scientific Publishing Co. Pte. Ltd., vol. 2(03), pages 175-208.
    9. Partha Dasgupta, 2008. "Discounting climate change," Journal of Risk and Uncertainty, Springer, vol. 37(2), pages 141-169, December.
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    More about this item

    Keywords

    Environmental Economics and Policy;

    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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