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Cost Risk Analysis: Dynamically Consistent Decision-Making under Climate Targets

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  • Hermann Held

    (University of Hamburg)

Abstract

Cost risk analysis (CRA) is currently emerging as a noticed decision-analytic framework within the field of climate economics. It combines the expected utility-based structure of cost–benefit analysis with the target-based approach of cost effectiveness analysis (CEA). As such, it offers a promising candidate for those decision-makers who would like to express their precautionary attitude in view of deeply uncertain global warming impacts through a temperature target, yet who would like to avoid the dynamic inconsistencies of CEA. We review both its rationale and key results derived from it. (1) Without a delay in mitigation policy as against the CRA-optimal solution, CRA produces solutions resembling those obtained by means of cost effectiveness analysis, thereby retroactively justifying the approach underlying the nearly 1000 scenarios gathered in IPCC AR5. (2) With an increasing delay, however, CRA would result in decreasing mitigation costs, contrary to CEA. (3) CRA has demonstrated that it is possible to determine the economic value of climate information, unlike CEA. Here, for the first time, a complete list of the assumptions on which CRA is based is presented, including a missing proof. In closing, we explain finding (1) and thereby also show that, without a delay, CRA-based solutions are universal in that they essentially do not depend on the choice of a ‘risk function.’

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  • Hermann Held, 2019. "Cost Risk Analysis: Dynamically Consistent Decision-Making under Climate Targets," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 72(1), pages 247-261, January.
    • Handle: RePEc:kap:enreec:v:72:y:2019:i:1:d:10.1007_s10640-018-0288-y
    DOI: 10.1007/s10640-018-0288-y
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    Cited by:

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    2. Held, Hermann, 2020. "Cost Risk Analysisː How Robust Is It in View of Weitzman's Dismal Theorem and Undetermined Risk Functions?," WiSo-HH Working Paper Series 55, University of Hamburg, Faculty of Business, Economics and Social Sciences, WISO Research Laboratory.
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    5. Schreyer, Felix & Held, Hermann, 2020. "How to formulate climate targets under uncertainty and anticipated future learning about climate sensitivity? – An axiomatic review of the strong sustainability paradigm," WiSo-HH Working Paper Series 54, University of Hamburg, Faculty of Business, Economics and Social Sciences, WISO Research Laboratory.

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