HOW TO MEASURE THE IMPORTANCE OF CLIMATE RISK FOR DETERMINING OPTIMAL GLOBAL ABATEMENT POLICIES?

Alexander Lorenz (), Elmar Kriegler, Hermann Held and Matthias G. W. Schmidt
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Alexander Lorenz: Potsdam Institute for Climate Impact Research, 14412 Potsdam, Germany;
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

Climate Change Economics (CCE), 2012, vol. 03, issue 01, 1-28

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.

Keywords: Integrated assessment; climate change; uncertainty; climate risk; mitigation policies (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:wsi:ccexxx:v:03:y:2012:i:01:n:s2010007812500042

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DOI: 10.1142/S2010007812500042

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