Epstein–Zin Utility in DICE: Is Risk Aversion Irrelevant to Climate Policy?

Ackerman, Frank; Stanton, Elizabeth A.; Bueno, Ramón

doi:10.1007/s10640-013-9645-z

Cited by 80 publications

(73 citation statements)

References 20 publications

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“…While the theoretical analysis is based on risk neutrality, higher values of risk aversion have been suggested in the literature. However, when we allowed for different degrees of risk aversion, the results remained almost unchanged, a fact in line with the findings of, e.g., Ackerman, Stanton, and Bueno [1]. The second model extension regards the development and inclusion of a geoengineering module.…”

Section: Numerical Results With An Integrated Assessment Modelsupporting

confidence: 83%

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Geoengineering and Abatement: A 'Flat' Relationship Under Uncertainty

Emmerling

Tavoni

2013

SSRN Journal

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The potential of geoengineering as an alternative or complementary option to mitigation and adaptation has received increased interest in recent years.The scientific assessment of geoengineering is driven to a large extent by assumptions about its effectiveness, costs, and impacts, all of which are highly uncertain. This has led to a polarizing debate. This paper evaluates the role of Solar Radiation Management (SRM) on the optimal abatement path, focusing on the uncertainty about the effectiveness of SRM and the interaction with uncertain climate change response. Using standard economic models of dynamic decision theory under uncertainty, we show that abatement is decreasing in the probability of success of SRM, but that this relation is concave and thus that significant abatement reductions are optimal only if SRM is very likely to be effective. The results are confirmed even when considering positive correlation structures between the effectiveness of geoengineering and the magnitude of climate change. Using a stochastic version of an Integrated Assessment Model, the results are found to be robust for a wide range of parameters specification. * A previous version of this paper was circulated under the name "Geoengineering and uncertainty". The authors would like to thank Michael Ghil and participants of a Workshop on Coupled Climate-Economics Modelling and Data Analysis at ENS, Paris and of the FEEM-CMCC convention 2012 in Venice for very helpful comments. This work is part of the research developed under the GEMINA project, funded by the Italian Ministry for the Environment, Land and Sea. The usual caveat applies.† Fondazione Eni Enrico Mattei (FEEM) and Centro-Euro Mediterraneo per i Cambiamenti Climatici (CMCC), Corso Magenta, 63,

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Section: Numerical Results With An Integrated Assessment Modelsupporting

confidence: 83%

“…instead of the constraint in the problem (1). The objective of the Social Planner now can be written…”

Section: Cost-benefit Analysis (Cba)mentioning

confidence: 99%

Geoengineering and Abatement: A 'Flat' Relationship Under Uncertainty

Emmerling

Tavoni

2013

SSRN Journal

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“…13). In such contexts, different decision-making criteria and preferences over risks have been shown to have a significant impact on the optimal abatement strategy 14,15 . However, these exercises lack detail in the representation of the mitigation options and the climate dynamics.…”

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confidence: 99%

Selection of climate policies under the uncertainties in the Fifth Assessment Report of the IPCC

2015

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Strategies for dealing with climate change must incorporate and quantify all the relevant uncertainties, and be designed to manage the resulting risks 1 . Here we employ the best available knowledge so far, summarized by the three working groups of the Fifth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC AR5; refs 2-4), to quantify the uncertainty of mitigation costs, climate change dynamics, and economic damage for alternative carbon budgets. We rank climate policies according to di erent decision-making criteria concerning uncertainty, risk aversion and intertemporal preferences. Our findings show that preferences over uncertainties are as important as the choice of the widely discussed time discount factor. Climate policies consistent with limiting warming to 2• C above preindustrial levels are compatible with a subset of decision-making criteria and some model parametrizations, but not with the commonly adopted expected utility framework.Many of the uncertainties surrounding climate change are difficult to quantify and depend on the judgement of experts and on the type of model used to generate future scenarios. Each model produces a distribution over the possible states of nature (for example, cost of mitigation, temperature increase, or economic damage from climate change), and these distributions might differ from model to model. How should we select climate policy in the face of these uncertainties? This paper addresses this question using a framework that accounts for both state uncertainty (for example, the distribution over states of nature) and model uncertainty (for example, the different models (or experts) which generate distributions over states) 5 . We investigate a variety of preferences and assumptions over these two types of uncertainty. A special case is the subjective expected utility 6 framework, traditionally used in economic evaluations. However, an expected utility setting might not work when the information is incomplete and ambiguous, which is clearly the case for climate change 7 . Moreover, people are known to approach risks and uncertainties differently 8 . The proposed setting allows us to explore additional decision-making criteria to deal with uncertainty, in the spirit of refs 7,9. Alternative statistical techniques, consistent with Bayesian approaches, have been developed to cope with model uncertainty 10 . Model weighting is an active topic in climate research 11 , where historical observations provide a basis for model evaluation, although it is not commonly used 12 . Although our framework is sufficiently flexible to accommodate different prior probability measure over the set of possible models, our baseline model assumes a uniform prior with equal model weights.The literature on the role of uncertainty in climate policy making has mostly relied on either analytical or simplified integrated assessment models (IAMs), such as DICE (ref. 13). In such contexts, different decision-making criteria and preferences over risks have been shown to have a sig...

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“…Figure 1: Mean optimal temperature for Agriculture according to Ackerman and Munitz (2012) climate change across the world. Figure 1 shows the estimated optimal temperatures for agriculture (in changes in degree Celsius compared to 1990).…”

Section: Risk Sharing and Climate Changementioning

confidence: 99%

Sharing of Climate Risks across World Regions

Emmerling

2014

SSRN Journal

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Uncertainty is prevalent in the context of climate change impacts. Moreover, the distribution across the globe is not uniform. We analyze how climate risks could be reduced via an insurance scheme at the global scale across regions and quantify the potential welfare gains from such a scheme. Starting from the standard welfare analysis in Integrated Assessment Models (IAMs), which assumes no risk sharing across region, we introduce global risk sharing via a market for state-dependent Arrow-Debreu securities. We show that this allows equalizing relative consumption differences between states of the world across regions. We estimate that such risk sharing scheme of climate risks could lead to welfare gains reducing the global costs of climate change by up to one third, while the amount of transfers required is substantial. This provides arguments for considering risk sharing in IAMs, but also for potentially welfare increasing negotiations about sharing risks of climate change at the global level.

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Epstein–Zin Utility in DICE: Is Risk Aversion Irrelevant to Climate Policy?

Cited by 80 publications

References 20 publications

Geoengineering and Abatement: A 'Flat' Relationship Under Uncertainty

Geoengineering and Abatement: A 'Flat' Relationship Under Uncertainty

Selection of climate policies under the uncertainties in the Fifth Assessment Report of the IPCC

Sharing of Climate Risks across World Regions

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