After a short review of traditional welfare evaluation of climate change the paper turns its focus especially on uncertainty and reviews in this context the appropriateness of commonly used economic models for advising climate policy.
Climate policy with regard to welfare optimization needs to focus on long-term development in the context of a sustainable future. Two prominent debates have been raised and sharply discussed. First, the long-term view has been highlighted by the appearance of the Stern review, which triggered a lively discussion on an adequate discount rate in the last decade. Second, the probability of the occurrence of severe disasters has been stressed. These considerations are mainly based on fat tails of a probability distribution, an issue initially raised by Weitzman. Based on structural uncertainties of input factors like climate sensitivity, society might experience an infinite high loss for low likelihood catastrophic disasters. His assumptions have been carefully scrutinized and revised in literature, which additionally provoked the question of applicability of traditional economic models. In addition, raising concerns are the potential tipping points that may lead to unpredictable impacts. A stringent policy has been suggested which can be mitigated over time while learning more about uncertainties through investigations.
Table of Contents
1. Introduction
1.1. Climate Change and Sustainable Development
1.2. Welfare Evaluation and Terminology
2. Review of Literature and Findings
2.1. Discount Rate
2.2. Predictions and Uncertainties
3. The Role of Uncertainty
3.1. Weitzman’s Dismal Theorem
3.2. Validation and Criticism
3.3. State of Affairs and Non-probabilistic Models
4. Conclusion and Outlook
Objectives and Topics
This paper examines the limitations of standard economic models and Integrated Assessment Models (IAMs) when evaluating welfare in the context of climate change, specifically focusing on how structural uncertainties and low-probability, high-impact catastrophic events are treated in economic policy advice.
- Analysis of discount rates in climate change economics
- Evaluation of uncertainty and fat-tailed probability distributions
- Critique of Cost-Benefit Analysis (CBA) and expected utility models
- The impact of Weitzman’s "Dismal Theorem" on policy
- Exploration of alternative decision frameworks like the precautionary principle, maximin, and minimax regret
Excerpt from the Book
3.1. Weitzman’s Dismal Theorem
Weitzman (2009, 2011a, 2011b) made a decisive breakthrough concerning uncertainty as he steers away the attention from the debate for a suitable discount rate and rather puts emphasis on high-impact catastrophes caused by climate change that might predominate.
“At high enough greenhouse gas (GHG) concentrations, climate change might conceivably cause catastrophic damages with small but nonnegligible probabilities. Other things being equal, this should lower the discount rate used to evaluate mitigation-investment decisions and raise the social cost of carbon (SCC).” (Weitzman, 2014: 544)
He raises concern over a CBA that depends on expected discounted utility function, which depends mainly on the modelers themselves. He argues that structural uncertainties in the fat tails of PDFs have thus far not been taken into account and make calculation of CBAs even non-feasible. Hence, he questions the applicability of CBA grounded on expected utility with uncertainties and stresses, that economy is unable to provide predictable data concerning the accompanied losses for a climate disaster and science is pervaded by profound uncertainty. His model, the dismal theorem (DT), is based on fat-tailed probability distributions, which turns one’s attention to unexpected disasters, which is indispensable according to him.
Chapter Summaries
1. Introduction: Outlines the challenge of climate change for future generations and introduces the need for models that properly address structural uncertainties and catastrophic risks.
2. Review of Literature and Findings: Reviews the existing economic discourse on discount rates and the inherent difficulties in predicting impacts and costs for future climate scenarios.
3. The Role of Uncertainty: Examines Weitzman's Dismal Theorem, the criticism surrounding it, and alternative non-probabilistic models for climate policy under deep uncertainty.
4. Conclusion and Outlook: Summarizes the findings regarding the limitations of traditional models and emphasizes the necessity for more cautious policy approaches and further research.
Keywords
Climate Change, Welfare, Uncertainty, Disasters, Discount Rate, Integrated Assessment Models, Social Cost of Carbon, Dismal Theorem, Fat Tails, Cost-Benefit Analysis, Expected Utility, Maximin, Minimax Regret, Precautionary Principle, Sustainability
Frequently Asked Questions
What is the primary focus of this paper?
The paper evaluates the effectiveness of standard economic models and Integrated Assessment Models in addressing the complexities and deep uncertainties associated with climate change and future disasters.
What are the central themes discussed in the work?
The work centers on the treatment of structural uncertainty, the ethics of discounting, the limitations of Cost-Benefit Analysis, and the policy implications of catastrophic climate risks.
What is the main research objective?
The objective is to analyze whether commonly used economic tools are appropriate for advising climate policy, given the existence of fat-tailed probability distributions and potential tipping points.
Which scientific methods are analyzed in this paper?
The paper scrutinizes Cost-Benefit Analysis, expected utility models, and discusses alternative decision-making frameworks such as the maximin criterion, minimax regret, and the precautionary principle.
What is covered in the main body of the text?
The main body reviews the literature on discount rates, details Weitzman's Dismal Theorem, validates this theorem through critical academic feedback, and explores the viability of non-probabilistic models.
Which keywords best characterize this research?
Key terms include Climate Change, Uncertainty, Social Cost of Carbon, Dismal Theorem, Fat Tails, and Welfare Evaluation.
How does Weitzman’s Dismal Theorem challenge traditional climate economics?
It argues that if catastrophic outcomes have fat-tailed probabilities, standard expected utility tools may lead to infinite estimates of loss, rendering traditional Cost-Benefit Analysis inapplicable.
What is the significance of the "fat tail" discussion?
It highlights that small probabilities of extreme climate impacts cannot be ignored and that they fundamentally alter how we should calculate the risks and benefits of climate mitigation strategies.
Do the authors suggest that current economic models are sufficient?
No, the paper suggests that current models are often based on arbitrary inputs and subjective estimations, necessitating a shift toward more transparent and expert-driven approaches.
- Arbeit zitieren
- Anonym (Autor:in), 2016, Welfare Evaluation of Climate Change and Future Disasters, München, GRIN Verlag, https://www.grin.com/document/909629
