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Uncertainty and global warming : an option - pricing approach to policy


  • Baranzini, Andrea
  • Chesney, Marc
  • Morisset, Jacques


Uncertainty is inherent in the analysis of global warming issues. Not only is there considerable scientific uncertainty about the magnitude of global warming, but even if that problem were resolved, there is uncertainty about what monetary value to assign to the costs and benefits of various policies to reduce global warming. And yet the influence of uncertainty in policymaker's decisions is ignored in most studies of the issue. The authors try to explicitly incorporate the effect of uncertainty in the choice of global warming abatement policies. The approach they develop draws on the emerging literature on investment under uncertainty - in particular, that on the option-valuation approach. Their numerical applications focus on the Cline's (1992) analysis of global warming, but it may be applied to a range of global warming analyses. First, they assess whether it is optimal to implement Cline's strategy of limiting global warming today, or whether it should be postponed, and for how long. Then, they identify the optimal policy to be implemented today for different levels of uncertainty about the costs and benefits of policies to reduce global warming.

Suggested Citation

  • Baranzini, Andrea & Chesney, Marc & Morisset, Jacques, 1995. "Uncertainty and global warming : an option - pricing approach to policy," Policy Research Working Paper Series 1417, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1417

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    References listed on IDEAS

    1. Kravis, Irving B., 1981. "An approximation of the relative real per capita GDP of the People's Republic of China," Journal of Comparative Economics, Elsevier, vol. 5(1), pages 60-78, March.
    2. Liu, Ta-Chung & Yeh, Kung-Chia, 1973. "Chinese and Other Asian Economies: A Quantitative Evaluation," American Economic Review, American Economic Association, vol. 63(2), pages 215-223, May.
    3. Bhagwati, Jagdish N, 1984. "Why Are Services Cheaper in the Poor Countries?," Economic Journal, Royal Economic Society, vol. 94(374), pages 279-286, June.
    4. W. Erwin Diewert, 1985. "Microeconomic Approaches to the Theory of International Comparisons," NBER Technical Working Papers 0053, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Baranzini, Andrea & Chesney, Marc & Morisset, Jacques, 2003. "The impact of possible climate catastrophes on global warming policy," Energy Policy, Elsevier, vol. 31(8), pages 691-701, June.


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