Ambiguity and Climate Policy

Antony Millner, Simon Dietz and Geoffrey Heal

No 16050, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Economic evaluation of climate policy traditionally treats uncertainty by appealing to expected utility theory. Yet our knowledge of the impacts of climate change may not be of sufficient quality to justify probabilistic beliefs. In such circumstances it has been argued that the axioms of expected utility theory may not be the the correct standard of rationality. By contrast several recently-proposed axiomatic frameworks account for ambiguous beliefs. We follow this approach and apply static and dynamic versions of a smooth ambiguity model to climate policy, obtaining general results on the comparative statics of optimal abatement and ambiguity aversion and illustrating this sufficient condition in some simple examples. Greater ambiguity aversion may lead to more or less abatement depending on the details of the model. We then extend our analysis to a dynamic setting and adopt a well-known integrated assessment model to show that the value of emissions abatement increases as ambiguity aversion increases, and that this "ambiguity premium" can in some plausible cases be very large.

JEL-codes: D81 Q54 (search for similar items in EconPapers)
Date: 2010-06
Note: EEE PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (37)

Published as “Scientific ambiguity and climate policy”, with Geoffrey Heal and Simon Dietz, Environmental and Resource Economics, Vol 55 (1), pp 21-46, 2013. Also appeared as NBER Working Paper no. 16050.

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Working Paper: Ambiguity and climate policy (2010)
Working Paper: Ambiguity and climate policy (2010)
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