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How To Measure The Importance Of Climate Risk For Determining Optimal Global Abatement Policies?

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  • ALEXANDER LORENZ

    (Potsdam Institute for Climate Impact Research, 14412 Potsdam, Germany;
    Environmental Change Institute, School of Geography and the Environment, University of Oxford, South Parks Road, Oxford, OX1 3QY, UK)

  • ELMAR KRIEGLER

    (Potsdam Institute for Climate Impact Research, 14412 Potsdam, Germany)

  • HERMANN HELD

    (University of Hamburg & KlimaCampus Hamburg, Bundesstr. 55, 20146 Hamburg, Germany)

  • MATTHIAS G. W. SCHMIDT

    (Potsdam Institute for Climate Impact Research, 14412 Potsdam, Germany)

Abstract

We investigate the importance of explicitly accounting for uncertainty in the determination of optimal global climate policy. We demonstrate that the marginal risk premium determines the importance of adapting the optimal policy to uncertainty. Common integrated assessment models (IAM) of climate change suggest uncertainty has little effect because the marginal risk premium in these models is small. A rigorous investigation of the marginal risk premium and the marginal functional relationships within IAMs allows understanding the non-significance of (thin-tailed) uncertainty as a result of compensating factors in the climate cause-effect chain.

Suggested Citation

  • Alexander Lorenz & Elmar Kriegler & Hermann Held & Matthias G. W. Schmidt, 2012. "How To Measure The Importance Of Climate Risk For Determining Optimal Global Abatement Policies?," Climate Change Economics (CCE), World Scientific Publishing Co. Pte. Ltd., vol. 3(01), pages 1-28.
    • Handle: RePEc:wsi:ccexxx:v:03:y:2012:i:01:n:s2010007812500042
    DOI: 10.1142/S2010007812500042
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    References listed on IDEAS

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    1. Pizer, William, 1997. "Optimal Choice of Policy Instrument and Stringency Under Uncertainty: The Case of Climate Change," RFF Working Paper Series dp-97-17, Resources for the Future.
    2. Martin L. Weitzman, 2012. "GHG Targets as Insurance Against Catastrophic Climate Damages," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 14(2), pages 221-244, March.
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    Cited by:

    1. 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.
    2. Franziska Piontek & Matthias Kalkuhl & Elmar Kriegler & Anselm Schultes & Marian Leimbach & Ottmar Edenhofer & Nico Bauer, 2019. "Economic Growth Effects of Alternative Climate Change Impact Channels in Economic Modeling," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 73(4), pages 1357-1385, August.
    3. 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.
    4. Delf Neubersch & Hermann Held & Alexander Otto, 2014. "Operationalizing climate targets under learning: An application of cost-risk analysis," Climatic Change, Springer, vol. 126(3), pages 305-318, October.

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