Climatic Change

, Volume 95, Issue 3–4, pp 297–315 | Cite as

Limitations of integrated assessment models of climate change

  • Frank Ackerman
  • Stephen J. DeCanioEmail author
  • Richard B. Howarth
  • Kristen Sheeran
Open Access


The integrated assessment models (IAMs) that economists use to analyze the expected costs and benefits of climate policies frequently suggest that the “optimal” policy is to go slowly and to do relatively little in the near term to reduce greenhouse gas emissions. We trace this finding to the contestable assumptions and limitations of IAMs. For example, they typically discount future impacts from climate change at relatively high rates. This practice may be appropriate for short-term financial decisions but its extension to intergenerational environmental issues rests on several empirically and philosophically controversial hypotheses. IAMs also assign monetary values to the benefits of climate mitigation on the basis of incomplete information and sometimes speculative judgments concerning the monetary worth of human lives and ecosystems, while downplaying scientific uncertainty about the extent of expected damages. In addition, IAMs may exaggerate mitigation costs by failing to reflect the socially determined, path-dependent nature of technical change and ignoring the potential savings from reduced energy utilization and other opportunities for innovation. A better approach to climate policy, drawing on recent research on the economics of uncertainty, would reframe the problem as buying insurance against catastrophic, low-probability events. Policy decisions should be based on a judgment concerning the maximum tolerable increase in temperature and/or carbon dioxide levels given the state of scientific understanding. The appropriate role for economists would then be to determine the least-cost global strategy to achieve that target. While this remains a demanding and complex problem, it is far more tractable and epistemically defensible than the cost-benefit comparisons attempted by most IAMs.


Discount Rate Climate Policy Contingent Valuation Social Welfare Function Integrate Assessment Model 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


  1. Ackerman F, Finlayson IJ (2006) The economics of inaction on climate change: a sensitivity analysis. Clim Policy 6:509–526CrossRefGoogle Scholar
  2. Ackerman F, Heinzerling L (2004) Priceless: on knowing the price of everything and the value of nothing. The New Press, New YorkGoogle Scholar
  3. Amano A (1997) On some integrated assessment modeling debates. Paper presented at IPCC Asia-Pacific Workshop on Integrated Assessment Models, United Nations University, Tokyo, March 10–12Google Scholar
  4. Bella G (2006) A blueprint for optimal intertemporal consumption under environmental constraints: the modified green golden rule. Available at SSRN:
  5. Bosello F, Roson R, Tol RSJ (2006) Economy-wide estimates of the implications of climate change: human health. Ecol Econ 58:579–591CrossRefGoogle Scholar
  6. Broome J (1994) Discounting the future. Phil Pub Aff 23:128–156CrossRefGoogle Scholar
  7. Buffett B, Archer D (2004) Global inventory of methane clathrate: sensitivity to changes in the deep ocean. Earth Planet Sci Lett 227:185–199CrossRefGoogle Scholar
  8. Campbell JY (2003) Consumption-based asset pricing. In: Constantinides GM, Harris M, Stultz R (eds) Handbook of the economics of finance. Elsevier, Amsterdam, pp 804–887Google Scholar
  9. Carraro C, Gerlagh R, van der Zwaan B (2003) Endogenous technical change in environmental macroeconomics. Resour Energy Econ 25:1–10CrossRefGoogle Scholar
  10. Chichilnisky G (2000) An axiomatic approach to choice under uncertainty with catastrophic risks. Resour Energy Econ 22:221–231CrossRefGoogle Scholar
  11. Chichilnisky G, Heal G, Beltratti A (1995) The green golden rule. Econ Lett 49:175–179CrossRefGoogle Scholar
  12. Cline WR (1992) The economics of global warming. Institute for International Economics, Washington, DCGoogle Scholar
  13. Cochrane JH (2005) Asset pricing, revised edn. Princeton University Press, PrincetonGoogle Scholar
  14. Committee on Abrupt Climate Change, National Research Council (2002) Abrupt climate change: inevitable surprises. National Academies, Washington, DCGoogle Scholar
  15. Committee on Analysis of Global Change Assessments, National Research Council (2007) Analysis of global change assessments: lessons learned. National Academies, Washington, DCGoogle Scholar
  16. Dasgupta P (2008) Discounting climate change. J Risk Uncertainty 37:141–169CrossRefGoogle Scholar
  17. Dasgupta PS, Heal GM (1979) Economic theory and exhaustible resources. Cambridge, Cambridge Univ PressGoogle Scholar
  18. Dasgupta P, Mäler KG, Barrett S (1999) Intergenerational equity, social discount rates, and global warming. In: Portney PR, Weyant JP (eds) Discounting and intergenerational equity. Resources for the Future, Washington, DC, pp 51–78Google Scholar
  19. DeCanio SJ (2003) Economic analysis, environmental policy, and intergenerational justice in the Reagan administration: the case of the Montreal protocol. Int Environ Agreements 3:299–321CrossRefGoogle Scholar
  20. DeCanio SJ, Niemann P (2006) Equity effects of alternative assignments of global environmental rights. Ecol Econ 56:546–559CrossRefGoogle Scholar
  21. DeCanio SJ, Dibble C, Amir-Atefi K (2000) The importance of organizational structure for the adoption of innovations. Manage Sci 46:1285–1299CrossRefGoogle Scholar
  22. DeCanio SJ, Dibble C, Amir-Atefi K (2001) Organizational structure and the behavior of firms: implications for integrated assessment. Clim Change 48:487–514CrossRefGoogle Scholar
  23. Diamond PA, Hausman JA (1994) Contingent valuation: is some number better than no number? J Econ Perspect 8:45–64Google Scholar
  24. Dietz S, Hope C, Stern N, Zenghelis D (2007) Reflections on the Stern review (1): a robust case for strong action to reduce the risks of climate change. World Econ 8:121–168Google Scholar
  25. Edenhofer O, Lessmann K, Kemfert C, Grubb M, Köhler J (2006) Induced technological change: exploring its implications for the economics of atmospheric stabilization: synthesis report from the innovation modeling comparison project. The Energy Journal, Endogenous Technological Change and the Economics of Atmospheric Stabilisation Special Issue 27:57–107Google Scholar
  26. Elliott RN, Langer T, Nadel (2006) Reducing oil use through energy efficiency: opportunities beyond light cars and trucks. American Council for an Energy Efficient Economy, Washington, DCGoogle Scholar
  27. Finman H, Laitner JA (2001) Industry, energy efficiency, and productivity improvements in proceedings of the 2001 ACEEE summer study on energy efficiency in industry. American Council for an Energy Efficient Economy, Washington, DCGoogle Scholar
  28. Frederick S, Loewenstein G, O’Donoghue T (2002) Time discounting and time preference. J Econ Lit XL:351–401CrossRefGoogle Scholar
  29. Gerlagh R (2007) Measuring the value of induced technological change. Energy Policy 35:5287–5297CrossRefGoogle Scholar
  30. Gillingham K, Newell RG, Pizer WA (2007) Modeling endogenous technological change for climate policy analysis. Resources for the Future, Washington DCGoogle Scholar
  31. Gjerde J, Grepperud S, Kverndokk S (1999) Optimal climate policy under the possibility of a catastrophe. Resour Energy Econ 21:289–317CrossRefGoogle Scholar
  32. Goodstein E (2007) Economics and the environment, 5th edn. Wiley, New York, pp 409–411Google Scholar
  33. Goulder LH, Schneider SH (1999) Induced technological change and the attractiveness of CO2 abatement policies. Resour Energy Econ 21:211–253CrossRefGoogle Scholar
  34. Hall DC, Behl RJ (2006) Integrating economic analysis and the science of climate instability. Ecol Econ 57:442–465CrossRefGoogle Scholar
  35. Hanemann WM (1994) Valuing the environment through contingent valuation. J Econ Perspect 8:19–43Google Scholar
  36. Hoegh-Guldberg O, Mumby PJ, Hooten AJ, Steneck RS, Greenfield P, Gomez E, Harvell CD, Sale PF, Edwards AJ, Caldeira K, Knowlton CM, Eakin R, Iglesias-Prieto R, Muthiga N, Bradbury RH, Dubi A, Hatziolos ME (2007) Coral reefs under rapid climate change and ocean acidification. Science 318:1737–1742CrossRefGoogle Scholar
  37. Hoel M, Sterner T (2007) Discounting and relative prices. Clim Change 84:265–280CrossRefGoogle Scholar
  38. Howarth RB (1996) Climate change and overlapping generations. Contemp Econ Policy 14:100–111Google Scholar
  39. Howarth RB (1998) An overlapping generations model of climate-economy interactions. Scand J Econ 100:575–591CrossRefGoogle Scholar
  40. Howarth RB (2003) Discounting and uncertainty in climate change policy analysis. Land Econ 79:369–381CrossRefGoogle Scholar
  41. Howarth RB (2009) Discounting, uncertainty, and revealed time preference. Land Econ 85:24–40Google Scholar
  42. Howarth RB, Norgaard RB (1992) Environmental valuation under sustainable development. Am Econ Rev 82:473–477Google Scholar
  43. Howarth RB, Norgaard RB (2007) CO2 emissions: getting bang for the buck. Science 318:1865–1866Google Scholar
  44. Intergovernmental Panel on Climate Change (1996) In: Bruce JP, Lee H, Haites EF (eds) Climate change 1995: economic and social dimensions of climate change, contribution of working group III to the second assessment report of the intergovernmental panel on climate change. Cambridge Univ Press, Cambridge, UKGoogle Scholar
  45. Intergovernmental Panel on Climate Change (2001) In: Metz B, Davidson O, Swart R, Pan J (eds) Climate change 2001: contribution of working group III to the third assessment report of the intergovernmental panel on climate change. Cambridge Univ Press, Cambridge, UKGoogle Scholar
  46. Intergovernmental Panel on Climate Change (2007a) Summary for policymakers. In: Solomon S, Qin D, Manning M, Chen Z, Marquis M, Averyt KB, Tignor M, Miller HL (eds) Climate change 2007: the physical science basis, contribution of working group I to the fourth assessment report of the intergovernmental panel on climate change. Cambridge Univ Press, Cambridge, UK and New YorkGoogle Scholar
  47. Intergovernmental Panel on Climate Change (2007b) In: Parry ML, Canziani OF, Palutikof JP, van der Linden PJ, Hanson CE (eds) Climate change 2007: impacts, adaptation and vulnerability, contribution of working group II to the fourth assessment report of the intergovernmental panel on climate change. Cambridge Univ Press, Cambridge, UK, pp 273–314Google Scholar
  48. Intergovernmental Panel on Climate Change (2007c) Summary for policymakers. In: Metz B, Davidson OR, Bosch PR, Dave R, Meyer LA (eds) Contribution of Working group III to the fourth assessment report of the intergovernmental panel on climate change. Cambridge Univ Press, Cambridge, UK, pp 9–12Google Scholar
  49. Interlaboratory Working Group on Energy-Efficient and Clean-Energy Technologies (2000) Scenarios for a clean energy future. Oak Ridge Natl Lab and Lawrence Berkeley Natl Lab, Oak Ridge, TN and Berkeley, CA. Available at: Google Scholar
  50. International Association for Energy Economics (IAEE) (2006) Endogenous technological change and the economics of atmospheric stabilisation special issue. Energy J 27:1–276Google Scholar
  51. Kahneman D, Tversky A (eds) (2000). Choices, values, and frames. Russell Sage Foundation, New YorkGoogle Scholar
  52. Kelly DL, Kolstad CD (1999) Integrated assessment models for climate change control. In: Folmer H, Tietenberg T (eds) International yearbook of environmental and resource economics 1999/2000: a survey of current issues. Edward Elgar, pp 171–197Google Scholar
  53. Kennedy M, Mrofka D, von der Borch C (2008) Snowball Earth termination by destabilization of equatorial permafrost methane clathrate. Nature 453:642–645CrossRefGoogle Scholar
  54. Krause F, DeCanio SJ, Hoerner A, Baer P (2002) Cutting carbon emissions at a profit (part I): opportunities for the United States. Contemp Econ Pol 20:339–365CrossRefGoogle Scholar
  55. Krause F, DeCanio SJ, Hoerner A, Baer P (2003) Cutting carbon emissions at a profit (part II): impacts on US competitiveness and jobs. Contemp Econ Pol 21:90–105CrossRefGoogle Scholar
  56. Laitner JA, DeCanio SJ, Peters I (2000) Incorporating behavioural, social, and organizational phenomena in the assessment of climate change mitigation options. In: Jochem E, Sathaye J, Bouille D (eds) Society, behaviour, and climate change mitigation. Kluwer Academic, Dordrecht, pp 1–64Google Scholar
  57. Laitner JA, Hanson DA, Mintzer I, Leonard JA (2006) Adapting for uncertainty: a scenario analysis of US technology energy futures. Energy Stud Rev 14:120–135Google Scholar
  58. Lenton TM, Held H, Kriegler E, Hall JW, Lucht W, Rahmstorf S, Schellnhuber J (2008) Tipping elements in the earth’s climate system. Proc Natl Acad Sci USA 105:1786–1793CrossRefGoogle Scholar
  59. Lovins AB (2005) More profit with less carbon. Sci Am Sept:74–82CrossRefGoogle Scholar
  60. Ludwig D, Brock WA, Carpenter SR (2005) Uncertainty in discount models and environmental accounting. Eco Soc 10:13Google Scholar
  61. Manne AS (2004) Perspective Paper 1.2. In: Lomborg B (ed) Global crises, global solutions. Cambridge Univ Press, Cambridge, pp 49–55Google Scholar
  62. Manne AS, Richels RG (1992) Buying greenhouse insurance: the economic costs of CO2 emissions limits. MIT, CambridgeGoogle Scholar
  63. McKinsey Global Institute (2007) Curbing global energy demand growth: the energy productivity opportunity, pp 1–24. Available at:
  64. Mehra R (2003) The equity premium: why is it a puzzle? Financ Anal J:54–69Google Scholar
  65. Mehra R, Prescott EC (1985) The equity premium: a puzzle. J Monet Econ 15:145–161CrossRefGoogle Scholar
  66. Mehra R, Prescott EC (2003) The equity premium in retrospect. In: Constantinides GM, Harris M, Stultz R (eds) Handbook of the economics of finance. Elsevier, Amsterdam, pp 889–938Google Scholar
  67. Mendelsohn R (2004) Perspective paper 1.1. In: Lomborg B (ed) Global crises, global solutions. Cambridge University Press, Cambridge, pp 44–48Google Scholar
  68. Mendelsohn R, Morrison W, Schlesinger ME, Andronova NG (2000) Country-specific market impacts of climate change. Clim Change 45:553–569CrossRefGoogle Scholar
  69. Newell RG, Pizer WA (2003) Discounting the distant future: how much do uncertain rates increase valuations? J Environ Econ Manage 46:52–71CrossRefGoogle Scholar
  70. Nordhaus WD (2007a) A review of the stern review on the economics of climate change. J Econ Lit XLV:686–702CrossRefGoogle Scholar
  71. Nordhaus WD (2007b) The challenge of global warming: economic models and environmental policy. Available at
  72. Nordhaus WD, Boyer J (2000) Warming the world: economic models of global warming. MIT, CambridgeGoogle Scholar
  73. Paltsev S, Reilly JM, Jacoby HD, Gurgel AC, Metcalf GE, Sokolov AP, Holak JF (2007) Assessment of US cap-and-trade proposals. Available at SSRN:
  74. Pesaran H, Pettenuzzo D, Timmermann A (2007) Learning, structural instability, and present value calculations. Econ Rev 26(2–4):253–288CrossRefGoogle Scholar
  75. Portney PR (1994) The contingent valuation debate: why economists should care. J Econ Perspect 8:3–17Google Scholar
  76. Ramsey FP (1928) A mathematical theory of saving. Econ J 38:543–559CrossRefGoogle Scholar
  77. Reilly J, Paltsev S, Felzer B, Wang X, Kicklighter D, Melillo J, Prinn R, Sarofim M, Sokolov A, Wang C (2007) Global economic effects of changes in crops, pasture, and forests due to changing climate, carbon dioxide, and ozone. Energy Policy 35:5370–5383CrossRefGoogle Scholar
  78. Roe GH, Baker MB (2007) Why is climate sensitivity so unpredictable? Science 318:629–632CrossRefGoogle Scholar
  79. Sandsmark M, Vennemo H (2007) A portfolio approach to climate investments: CAPM and endogenous risk. Environ Resour Econ 4:681–695CrossRefGoogle Scholar
  80. Schellnhuber HJ, Cramer W, Nakicenovic N, Wigley T, Yohe G (eds) (2006) Avoiding dangerous climate change. Cambridge University Press, Cambridge, UKGoogle Scholar
  81. Schlenker W, Hanemann WM, Fisher AC (2006) The impact of global warming on U.S. agriculture: an econometric analysis of optimal growing conditions. Rev Econ Stat 88:113–125CrossRefGoogle Scholar
  82. Shipley AM, Elliott RN (2006) Ripe for the picking: have we exhausted the low hanging fruit in the industrial sector? American Council for an Energy Efficient Economy, Washington, DC, Report No. IE061. Available at: Google Scholar
  83. Solow RM (1970) Growth theory: an exposition. Oxford University Press, New YorkGoogle Scholar
  84. Stern N (2006) Stern review on the economics of climate change. Her Majesty’s Treasury, LondonGoogle Scholar
  85. Tol RSJ (1994) The damage costs of climate change—a note on tangibles and intangibles, applied to DICE. Energy Policy 22:436–438CrossRefGoogle Scholar
  86. Tol RSJ (2002a) Estimates of the damage costs of climate change: part I. Benchmark estimates. Environ Resour Econ 21:47–73CrossRefGoogle Scholar
  87. Tol RSJ (2002b) Estimates of the damage costs of climate change: part II. Dynamic estimates. Environ Resour Econ 21:135–160, p 157CrossRefGoogle Scholar
  88. Toth FL (2003) Integrated assessment of climate protection strategies—guest editorial. Clim Change 56:1–5CrossRefGoogle Scholar
  89. Toth FL, Mwandosya M (Co-ordinating Lead Authors), Carraro C, Christensen J, Edmonds J, Flannery B, Gay-Garcia C, Lee H, Meyer-Abich KM, Nikitina E, Rahman A, Richels R, Reqiu Y, Villavicencio A, Wake Y, Weyant J (Lead Authors), Byrne J, Lempert R, Meyer I, Underdal A (Contributing Authors), Pershing J, Shechter M (Review Editors) (2001) Decision-making frameworks, chapter 10 of climate change 2001: mitigation, contribution of working group III to the third assessment report of the intergovernmental panel on climate change. Cambridge University Press, Cambridge, UKGoogle Scholar
  90. Toth FL, Bruckner T, Füssel HM, Leimbach M, Petschel-Held G (2003) Integrated assessment of long-term climate policies: part 1—model presentation. Clim Change 56:37–56CrossRefGoogle Scholar
  91. US National Assessment (2001) Climate change impacts on the united states: the potential consequences of climate variability and change. Report for the US Global Change Research Program. Cambridge University Press, Cambridge UKGoogle Scholar
  92. Weitzman ML (2007a) A review of the Stern review on the economics of climate change. J Econ Lit XLV:703–724CrossRefGoogle Scholar
  93. Weitzman ML (2007b) Subjective expectations and asset-return puzzles. Am Econ Rev 97:1102–1130CrossRefGoogle Scholar
  94. Weitzman ML (2009) On modeling and interpreting the economics of catastrophic climate change. Rev Econ Stat 91:1–19CrossRefGoogle Scholar
  95. Worrell E, Laitner JA, Ruth M, Finman H (2003) Productivity benefits of industrial energy efficiency measures. Energy J 21:1081–1098CrossRefGoogle Scholar

Copyright information

© The Author(s) 2009

Authors and Affiliations

  • Frank Ackerman
    • 1
  • Stephen J. DeCanio
    • 2
    • 3
    Email author
  • Richard B. Howarth
    • 4
  • Kristen Sheeran
    • 5
    • 6
  1. 1.Stockholm Environment Institute-US CenterTufts UniversitySomervilleUSA
  2. 2.UCSB Washington ProgramWashingtonUSA
  3. 3.Department of EconomicsUniversity of California, Santa BarbaraSanta BarbaraUSA
  4. 4.Environmental Studies ProgramDartmouth CollegeHanoverUSA
  5. 5.Economics for Equity and the Environment Network - a program of EcotrustPortlandUSA
  6. 6.Economics DepartmentSt. Mary’s College of MarylandSt. Mary’s CityUSA

Personalised recommendations