A quantitative minimax regret approach to climate change: Does discounting still matter?

Andries F. Hof, Detlef P. van Vuuren and Michel G.J. den Elzen

Ecological Economics, 2010, vol. 70, issue 1, 43-51

Abstract: Using cost-benefit analysis to determine an optimal climate mitigation target is criticised, especially because i) it fails to sufficiently take into account low-probability, high-impact events, and ii) results strongly depend on the discount rate used. One of the alternative suggestions to inform policymakers about the right mitigation target that does take the risks associated with low-probability, high-impact events explicitly into account is the minimax regret criterion. We apply the minimax regret criterion quantitatively using an integrated assessment model with extreme values for climate sensitivity, damage estimates and mitigation costs. The goal is to analyse whether such a method leads to different results compared to standard cost-benefit analysis and whether the results are still sensitive to the discount rate used. We find that the minimax regret approach leads to more stringent and robust climate targets for relatively low discount rates and if both a high climate sensitivity and high damage estimates are assumed. If one of these assumptions does not hold, the difference between the minimax regret approach and standard cost-benefit analysis is much smaller. Therefore, we conclude that the discount rate used can still be of vital importance even when applying a minimax regret approach.

Keywords: Climate; change; Cost-benefit; analysis; Risk; approach; Minimax; regret; Precautionary; principle (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (7)

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