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Managing Catastrophic Climate Risks Under Model Uncertainty Aversion

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  • Loïc Berger

    (LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique)

  • Johannes Emmerling
  • Massimo Tavoni

Abstract

We propose a robust risk management approach to deal with the problem of catastrophic climate change that incorporates both risk and model uncertainty. Using an analytical model of abatement, we show how aversion to model uncertainty influences the optimal level of mitigation. We disentangle the role of preferences from the structure of model uncertainty, which we define by means of a simple measure of disagreement across models. With data from an expert elicitation about climate change catastrophes, we quantify the relative importance of these two effects and calibrate a numerical integrated assessment model of climate change. The results indicate that the structure of model uncertainty, and specifically how model disagreement varies in abatement, is the key driver of optimal abatement and that model uncertainty warrants a higher level of climate change mitigation.
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Suggested Citation

  • Loïc Berger & Johannes Emmerling & Massimo Tavoni, 2017. "Managing Catastrophic Climate Risks Under Model Uncertainty Aversion," Post-Print hal-01744501, HAL.
  • Handle: RePEc:hal:journl:hal-01744501
    DOI: 10.1287/mnsc.2015.2365
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01744501
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    3. 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.
    4. Berger, Loïc & Bosetti, Valentina, 2020. "Characterizing ambiguity attitudes using model uncertainty," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 621-637.
    5. Marcel Nutz & Florian Stebegg, 2021. "Climate Change Adaptation under Heterogeneous Beliefs," Papers 2101.08424, arXiv.org.
    6. Baker, Erin & Bosetti, Valentina & Salo, Ahti, 2016. "Finding Common Ground when Experts Disagree: Belief Dominance over Portfolios of Alternatives," MITP: Mitigation, Innovation and Transformation Pathways 243147, Fondazione Eni Enrico Mattei (FEEM).
    7. Lemoine, Derek & Traeger, Christian P., 2016. "Ambiguous tipping points," Journal of Economic Behavior & Organization, Elsevier, vol. 132(PB), pages 5-18.
    8. Berger, Loïc & Emmerling, Johannes, 2017. "Welfare as Simple(x) Equity Equivalents," MITP: Mitigation, Innovation and Transformation Pathways 254044, Fondazione Eni Enrico Mattei (FEEM).
    9. Simon Quemin, 2016. "Intertemporal abatement decisions under ambiguity aversion in a cap and trade," Working Papers 1604, Chaire Economie du climat.
    10. Yongyang Cai, 2020. "The Role of Uncertainty in Controlling Climate Change," Papers 2003.01615, arXiv.org, revised Oct 2020.
    11. Loïc Berger & Massimo Marinacci, 2020. "Model Uncertainty in Climate Change Economics: A Review and Proposed Framework for Future Research," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 77(3), pages 475-501, November.
    12. Johanna Etner & Meglena Jeleva & Natacha Raffin, 0. "Climate policy: How to deal with ambiguity?," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 0, pages 1-39.
    13. Loic Berger & Valentina Bosetti, 2016. "Ellsberg re-revisited: An experiment disentangling model uncertainty and risk aversion," Working Papers 576, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    14. Arthur E. Attema & Han Bleichrodt & Olivier L'Haridon, 2018. "Ambiguity preferences for health," Health Economics, John Wiley & Sons, Ltd., vol. 27(11), pages 1699-1716, November.
    15. Massimo Marinacci, 2015. "Model Uncertainty," Journal of the European Economic Association, European Economic Association, vol. 13(6), pages 1022-1100, December.
    16. Ikefuji, Masako & Laeven, Roger J.A. & Magnus, Jan R. & Muris, Chris, 2020. "Expected utility and catastrophic risk in a stochastic economy–climate model," Journal of Econometrics, Elsevier, vol. 214(1), pages 110-129.
    17. Johanna Etner & Meglena Jeleva & Natacha Raffin, 2021. "Climate policy: How to deal with ambiguity?," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 72(1), pages 263-301, July.
    18. Emily Ho & David V. Budescu & Valentina Bosetti & Detlef P. Vuuren & Klaus Keller, 2019. "Not all carbon dioxide emission scenarios are equally likely: a subjective expert assessment," Climatic Change, Springer, vol. 155(4), pages 545-561, August.
    19. Loic Berger & Massimo Marinacci, 2017. "Model Uncertainty in Climate Change Economics," Working Papers 616, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    20. Haris Doukas & Alexandros Nikas & Mikel González-Eguino & Iñaki Arto & Annela Anger-Kraavi, 2018. "From Integrated to Integrative: Delivering on the Paris Agreement," Sustainability, MDPI, vol. 10(7), pages 1-10, July.
    21. Korotkov, Vladimir & Wu, Desheng, 2020. "Evaluating the quality of solutions in project portfolio selection," Omega, Elsevier, vol. 91(C).

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