Working Paper: NBER ID: w18607
Authors: Howard Kunreuther; Geoffrey Heal; Myles Allen; Ottmar Edenhofer; Christopher B. Field; Gary Yohe
Abstract: The selection of climate policies should be an exercise in risk management reflecting the many relevant sources of uncertainty. Studies of climate change and its impacts rarely yield consensus on the distribution of exposure, vulnerability, or possible outcomes. Hence policy analysis cannot effectively evaluate alternatives using standard approaches such as expected utility theory and benefit-cost analysis. This Perspective highlights the value of robust decision-making tools designed for situations, such as evaluating climate policies, where generally agreed-upon probability distributions are not available and stakeholders differ in their degree of risk tolerance. This broader risk management approach enables one to examine a range of possible outcomes and the uncertainty surrounding their likelihoods.
Keywords: climate change; risk management; decision-making
JEL Codes: C02; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| uncertainties surrounding climate change (Q54) | effectiveness of policy evaluations (D78) |
| ambiguity in climate sensitivity estimates (Q54) | increased willingness to invest in mitigation strategies (F64) |
| traditional methods (expected utility theory) (D81) | failure to capture complexities of uncertainties (D81) |
| uncertainties in storm surge and sea level rise (Q54) | robustness of the policy decision (E61) |
| low-probability, high-consequence events (D81) | disproportionate effect on cost-benefit analyses (H43) |