Evaluation of risk in cost-benefit analysis of climate change

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Abstract

Assumptions on risk aversion have an important influence on the results of climate change cost estimates. However, it is highly controversial which values should be used. They can hardly be deduced from market behaviour, as the empirical risk aversion differs widely according to context. Therefore, an empirical survey has been conducted to enhance our understanding of empirical risk aversion in the context of climate change. First results give strong evidence that different values of risk aversion should be used for different damage categories. The risk aversion in the cases of human lives lost, serious health damages and irreversible damages in general is considerably higher than when moderate economic losses are at stake. On the contrary current climate cost models usually use one single value for risk aversion. The survey tends to support high values of risk aversion in the context of climate change.