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Climate policy decisions under uncertainty

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  • Clarke, Harry

Abstract

The economics of global climate mitigation is discussed when there is imperfect knowledge of future climatic changes, of policy effectiveness and of the policy responses by different countries. Uncertainty is accounted for by using heuristics derived from classical decision rules. These heuristics provide plausible policy rules that depend on only limited information. They emphasize the possibility of “getting it wrong” in terms of the appropriate scale of policy response and from policy failure itself. The minimax rule or Precautionary Principle, which targets “worst case” situations, is not useful unless policies are effective with certainty. However the widespread presumption that policy action is warranted if climate-induced losses without action are “large" relative to costs of policy can be justified using minimax regret reasoning. The global analysis is extended to individual national decision-making when nations jointly play a game against nature with policy spillovers. Simultaneous moves game solutions as well as heuristics are provided and indicate how policy actions are best determined for individual countries rather than for a global authority.

Suggested Citation

  • Clarke, Harry, 2015. "Climate policy decisions under uncertainty," Working Papers 249517, Australian National University, Centre for Climate Economics & Policy.
  • Handle: RePEc:ags:ancewp:249517
    DOI: 10.22004/ag.econ.249517
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    References listed on IDEAS

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    1. Richard S.J. Tol, 2023. "Climate Economics," Books, Edward Elgar Publishing, number 21182.
    2. Robert S. Pindyck, 2013. "Climate Change Policy: What Do the Models Tell Us?," Journal of Economic Literature, American Economic Association, vol. 51(3), pages 860-872, September.
    3. Howard Kunreuther & Geoffrey Heal & Myles Allen & Ottmar Edenhofer & Christopher B. Field & Gary Yohe, 2013. "Risk management and climate change," Nature Climate Change, Nature, vol. 3(5), pages 447-450, May.
    4. Gernot Wagner & Martin L. Weitzman, 2016. "Climate Shock: The Economic Consequences of a Hotter Planet," Economics Books, Princeton University Press, edition 2, number 10725.
    5. Kenneth J. Arrow & Robert C. Lind, 1974. "Uncertainty and the Evaluation of Public Investment Decisions," Palgrave Macmillan Books, in: Chennat Gopalakrishnan (ed.), Classic Papers in Natural Resource Economics, chapter 3, pages 54-75, Palgrave Macmillan.
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    More about this item

    Keywords

    Environmental Economics and Policy; Risk and Uncertainty;

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • F64 - International Economics - - Economic Impacts of Globalization - - - Environment

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