Advertisement

Climatic Change

, Volume 56, Issue 3, pp 265–289 | Cite as

Is the Uncertainty about Climate Change too Large for Expected Cost-Benefit Analysis?

  • Richard S. J. Tol
Article

Abstract

Cost-benefit analysis is only applicable if the variances of both costs and benefits are finite. In the case of climate change, the variances of the net present marginal costs and benefits of greenhouse gas emission reduction need to be finite. Finiteness is hard, if not impossible to prove. The opposite is easier to establish as one only needs to show that there is one, not impossible representation of the climate change with infinite variance. The paper shows that all relevant current variables of theFUND model have finite variances. However, there is a small chance that climate change reverses economic growth in some regions. In that case, the discount rate becomes negative and the net present marginal benefits of greenhouse gas emission reduction becomes very large. So large, that its variance is unbounded. One could interpret this as an indication that cost-benefit analysis is invalid. Alternatively, one could argue that the infinity is present in both the base case and the policy scenario, and therefore irrelevant; in that interpretation, cost-benefit analysis is a valid tool.

Keywords

Climate Change Economic Growth Marginal Cost Discount Rate Base Case 
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.

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Alcamo, J. and Kreileman, G. J. J.: 1996a, ‘Emission Scenarios and Global Climate Protection’, Global Environ. Change 6(4), 305–334.Google Scholar
  2. Alcamo, J. and Kreileman, G. J. J.: 1996b, The Global Climate System: Near Term Action for Long Term Protection, 481508001, RIVM, Bilthoven, pp. 1–17.Google Scholar
  3. Batjes, J. J. and Goldewijk, C. G. M.: 1994, The IMAGE 2 Hundred Year (18901990) Database of the Global Environment (HYDE), 410100082, RIVM, Bilthoven.Google Scholar
  4. Burton, I., Kates, R.W., and White, G. F.: 1993, The Environment as Hazard, 2nd edn., The Guilford Press, New York.Google Scholar
  5. Collard, D.: 1988, ‘Catastrophic Risk, or: The Economics of Being Scared’, in Collard, D., Pearce, D.W., and Ulph, D. (eds.), Economics, Growth and Sustainable Environments: Essays in Memory of Richard Lecomber, MacMillan, New York.Google Scholar
  6. Dowlatabadi, H.: 1999, ‘Climate Change Thresholds and Guardrails for Emissions’, Clim. Change 41(3-4), 297–301.Google Scholar
  7. Eismont, O. and Welsch, H.: 1996, ‘Optimal Greenhouse Gas Emissions under Various Assessments of Climate Change Ambiguity’, Environ. Resour. Econ. Google Scholar
  8. Fankhauser, S., Tol, R. S. J., and Pearce, D.W.: 1997, ‘The Aggregation of Climate Change Damages: A Welfare Theoretic Approach’, Environ. Resour. Econ. 10, 249–266.Google Scholar
  9. Fankhauser, S., Tol, R. S. J., and Pearce, D. W.: 1998, ‘Extensions and Alternatives to Climate Change Impact Valuation: On the Critique of IPCC Working Group III's Impact Estimates’, Environment and Development Economics 3, 59–81.Google Scholar
  10. Hammitt, J. K.: 1995, ‘Outcome and Value Uncertainty in Global-Change Policy’, Clim. Change 30, 125–145.Google Scholar
  11. Hammitt, J. K., Lempert, R. J., and Schlesinger, M. E.: 1992, ‘A Sequential-Decision Strategy for Abating Climate Change’, Nature 357, 315–318.Google Scholar
  12. Harvey, L. D. D.: 1996a, ‘Development of a Risk-Hedging CO2-Emission Policy, Part I: Risks of Unrestrained Emissions’, Clim. Change 34, 1–40.Google Scholar
  13. Harvey, L. D. D.: 1996b, ‘Development of a Risk-Hedging CO2-Emission Policy, Part II: Risks Associated with Measures to Limit Emissions, Synthesis, and Conclusions’, Clim. Change 34, 41–71.Google Scholar
  14. Kattenberg, A., Giorgi, F., Grassl, H., Meehl, G. A., Mitchell, J. F. B., Stouffer, R. J., Tokioka, T., Weaver, A. J., and Wigley, T. M. L.: 1996, ‘Climate Models - Projections of Future Climate’, in Houghton, J. T., Meiro Filho, L.G., Callander, B. A., Harris, N., Kattenberg, A., and Maskell, K. (eds.), Climate Change 1995: The Science of Climate Change – Contribution of Working Group I to the Second Assessment Report of the Intergovernmental Panel on Climate Change, 1st edn., Cambridge University Press, Cambridge, pp. 285–357.Google Scholar
  15. Kolstad, C. D.: 1994, ‘George Bush versus Al Gore-Irreversibilities in Greenhouse Gas Accumulation and Emission Control Investment’, Energy Policy 22(9), 772–778.Google Scholar
  16. Kolstad, C. D.: 1996, ‘Learning and Stock Effects in Environmental Regulations: The Case of Greenhouse Gas Emissions’, J. Environ. Econ. Manage. 31, 1–18.Google Scholar
  17. Leggett, J., Pepper, W. J., and Swart, R. J.: 1992, ‘Emissions Scenarios for the IPCC: An Update’, in Houghton, J. T., Callander, B. A., and Varney, S. K. (eds.), Climate Change 1992 – The Supplementary Report to the IPCC Scientific Assessment, 1st edn., Cambridge University Press, Cambridge, pp. 71–95.Google Scholar
  18. Leimbach, M.: 1996,‘Development of a Fuzzy Optimization Model, Supporting Global Warming Decision-Making’, Environ. Resour. Econ. 7 163–192.Google Scholar
  19. Lempert, R. J., Schlesinger, M. E., and Bankes, S. C.: 1996, ‘When We Don't Know the Costs or the Benefits: Adaptive Strategies for Abating Climate Change’, Clim. Change 33, 235–274.Google Scholar
  20. Lind, R. C. (ed.): 1982, Discounting for Time and Risk in Energy Policy, Resources for the Future, Washington, D.C.Google Scholar
  21. Maddison, D. J.: 1995, ‘A Cost-Benefit Analysis of Slowing Climate Change’, Energy Policy 23(4/5), 337–346.Google Scholar
  22. Maier-Reimer, E. and Hasselmann, K.: 1987, ‘Transport and Storage of Carbon Dioxide in the Ocean: An Inorganic Ocean Circulation Carbon Cycle Model’, Clim. Dyn. 2, 63–90.Google Scholar
  23. Manne, A. S., Mendelsohn, R. O., and Richels, R. G.: 1995, ‘MERGE - A Model for Evaluating Regional and Global Effects of GHG Reduction Policies’, Energy Policy 23(1), 17–34.Google Scholar
  24. Manne, A. S. and Richels, R. G.: 1995, ‘The Greenhouse Debate: Economic Efficiency, Burden Sharing and Hedging Strategies’, Energy J. 16(4), 1–37.Google Scholar
  25. Manne, A. S. and Richels, R. G.: 1996, ‘The Berlin Mandate: The Costs of Meeting Post-2000 Targets and Timetables’, Energy Policy 24(3), 205–210.Google Scholar
  26. Manne, A. S. and Richels, R. G.: 1998, ‘On Stabilizing CO2 Concentrations-Cost-Effective Emission Reduction Strategies’, Environ. Model. Assess. 2, 251–265.Google Scholar
  27. Morgan, M. G. and Keith, D. W.: 1995, ‘Subjective Judgments by Climate Experts’, Environmental Science and Technology 29(10), 468A–476A.Google Scholar
  28. Nordhaus, W. D.: 1991, ‘To Slow or Not to Slow: The Economics of the Greenhouse Effect’, Economic Journal 101, 920–937.Google Scholar
  29. Nordhaus, W. D.: 1992, ‘An Optimal Transition Path for Controlling Greenhouse Gases’, Science 258, 1315–1319.Google Scholar
  30. Nordhaus, W. D.: 1993, ‘Rolling the “DICE”: An Optimal Transition Path for Controlling Greenhouse Gases’, Resource and Energy Economics 15, 27–50.Google Scholar
  31. Nordhaus, W. D.: 1994a, ‘Expert Opinion on Climate Change’, American Scientist, 45–51.Google Scholar
  32. Nordhaus, W. D.: 1994b, Managing the Global Commons: The Economics of Climate Change, The MIT Press, Cambridge.Google Scholar
  33. Nordhaus, W. D. and Popp, D.: 1997, ‘What is the Value of Scientific Knowledge? An Application to Global Warming Using the PRICE Model’, Energy J. 18(1), 1–45.Google Scholar
  34. Nordhaus, W. D. and Yang, Z.: 1996, ‘RICE: A Regional Dynamic General Equilibrium Model of Optimal Climate-Change Policy’, American Economic Review 86(4), 741–765.Google Scholar
  35. Pate-Cornell, E.: 1996, ‘Uncertainties in Global Climate Change Estimates’, Clim. Change 33, 145–149.Google Scholar
  36. Pearce, D.W., Achanta, A. N., Cline, W. R., Fankhauser, S., Pachauri, R., Tol, R. S. J., and Vellinga P.: 1996, ‘The Social Costs of Climate Change: Greenhouse Damage and the Benefits of Control’, in Bruce, J. P., Lee, H., and Haites, E. F. (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, Chapter 6, Cambridge University Press, Cambridge, pp. 179–224.Google Scholar
  37. Peck, S. C. and Teisberg, T. J.: 1992, ‘CETA: AModel for Carbon Emissions Trajectory Assessment’, Energy J. 13(1), 55–77.Google Scholar
  38. Peck, S. C. and Teisberg, T. J.: 1993, ‘Global Warming Uncertainties and the Value of Information: An Analysis using CETA’, Resource and Energy Economics 15, 71–97.Google Scholar
  39. Peck, S. C. and Teisberg, T. J.: 1994, ‘Optimal Carbon Emissions Trajectories When Damages Depend on the Rate or Level of Global Warming’, Clim. Change 28, 289–314.Google Scholar
  40. Peck, S. C. and Teisberg, T. J.: 1995, ‘Optimal CO2 Control Policy with Stochastic Losses from Temperature Rise’, Clim. Change 31, 19–34.Google Scholar
  41. Peck, S. C. and Teisberg, T. J.: 1996, ‘International CO2 Emissions Targets and Timetables: An Analysis of the AOSIS Proposal’, Environ. Model. Assess. 1(4), 219–227.Google Scholar
  42. Petschel-Held, G., Schellnhuber, H.-J., Bruckner, T., Toth, F. L., and Hasselmann, K.: 1999, ‘The Tolerable Windows Approach: Theoretical and Methodological Foundations’, Clim. Change 41, (3-4), 303–331.Google Scholar
  43. Raiffa, H.: 1970, Decision Analysis: Introductory Lectures on Choices under Uncertainty, Addison-Wesley, Reading.Google Scholar
  44. Schimmelpfennig, D.: 1996, ‘Uncertainty in Economic Models of Climate Change Impacts’, Clim. Change 33, 213–234.Google Scholar
  45. Schlaifer, R.: 1978, Analysis of Decisions under Uncertainty, Robert E. Krieger Publishing, Huntington.Google Scholar
  46. Shine, K. P., Derwent, R. G., Wuebbles, D. J., and Morcrette, J.-J.: 1990, ‘Radiative Forcing of Climate’, in Houghton, J. T., Jenkins, G. J., and Ephraums, J. J. (eds.), Climate ChangeThe IPCC Scientific Assessment, 1st edn., Cambridge University Press, Cambridge, pp. 41–68.Google Scholar
  47. Starrett, D.: 1988, Foundations of Public Economics, Cambridge University Press, Cambridge.Google Scholar
  48. Tol, R. S. J.: 1995, ‘The Damage Costs of Climate Change Toward more Comprehensive Calculations’, Environ. Resour. Econ. 5, 353–374.Google Scholar
  49. Tol, R. S. J.: 1996, ‘The Damage Costs of Climate Change Towards a Dynamic Representation’, Ecological Economics 19, 67–90.Google Scholar
  50. Tol, R. S. J.: 1997, ‘On the Optimal Control of Carbon Dioxide Emissions: An Application of FUND’, Environ. Model. Assess. 2, 151–163.Google Scholar
  51. Tol, R. S. J.: 1998a, ‘Kyoto Mistakes’, International Journal of Environment and Pollution 10(3/4), 503–507.Google Scholar
  52. Tol, R. S. J.: 1998b, ‘On the Difference in Impact of Two Almost Identical Climate Change Scenarios’, Energy Policy 26(1), 13–20.Google Scholar
  53. Tol, R. S. J.: 1999a, ‘Time Discounting and Optimal Control of Climate Change — An Application of FUND’, Clim. Change 41(3-4), 351–362.Google Scholar
  54. Tol, R. S. J.: 1999b, ‘Spatial and Temporal Efficiency in Climate Change: Applications of FUND’, Environ. Resour. Econ. 14(1), 33–49.Google Scholar
  55. Tol, R. S. J.: 1999c, ‘Kyoto, Efficiency, and Cost-Effectiveness: Applications of FUND’, Energy Journal Special Issue on the Costs of the Kyoto Protocol: A Multi-Model Evaluation, 130–156.Google Scholar
  56. Tol, R. S. J.: 1999d, ‘Safe Policies in an Uncertain Climate: An Application of FUND’, Global Environ. Change 9, 221–232.Google Scholar
  57. Tol, R. S. J.: 1999e, ‘The Marginal Costs of Greenhouse Gas Emissions’, Energy J. 20(1), 61–81.Google Scholar
  58. Tol, R. S. J.: 2002a, ‘Estimates of the Damage Costs of Climate Change, Part I: Benchmark Estimates’, Environ. Resour. Econ. 21(1), 47–73.Google Scholar
  59. Tol, R. S. J.: 2002b, ‘Estimates of the Damage Costs of Climate Change, Part II: Dynamic Estimates’, Environ. Resour. Econ. 21(1), 135–160.Google Scholar
  60. Tol, R. S. J., van der Burg, T., J ansen, H. M. A., and Verbruggen, H.: 1995, The Climate Fund-Some Notions on the Socio-Economic Impacts of Greenhouse Gas Emissions and Emission Reductions in an International Context, Institute for Environmental Studies R95/03, Vrije Universiteit, Amsterdam.Google Scholar
  61. Tol, R. S. J. and Downing, T. E.: 2000, The Marginal Costs of Climate Changing Gases, Institute for Environmental Studies D00/08, Vrije Universiteit, Amsterdam.Google Scholar
  62. Tol, R. S. J., Heintz, R. J., and Lammers, P. E. M.: in press, ‘Methane Emission Reduction: An Application of FUND’, Clim. Change, in press.Google Scholar
  63. Toth, F. L., Bruckner, T., Fussel, H.-M., Leimbach, M., Petschel-Held, G., and Schellnhuber, H.-J.: 1997, ‘The Tolerable Windows Approach to Integrated Assessments’, in Cameron, O. K., Fukuwatari, K., and Morita, T. (eds.), Climate Change and Integrated Assessment Models: Bridging the GapsProceedings of the IPCC Asia-PacificWorkshop on Integrated AssessmentModels, United Nations University, Tokyo, Japan, March 10–12, 1997, Center for Global Environmental Research, National, Institute for Environmental Studies, Tsukuba, pp. 403–430.Google Scholar
  64. Ulph, A. and Maddison, D. J.: 1997, ‘Uncertainty, Learning and International Environmental Policy Coordination’, Environ. Resour. Econ. 9 451–466.Google Scholar
  65. Welsch, H.: 1995, ‘Greenhouse Gas Abatement under Ambiguity’, Energy Economics 17(2), 91–100.Google Scholar
  66. Woodward, R.T and Bishop, R. C.: 1997, ‘How to Decide if Experts Disagree: Uncertainty Based Choice Rules in Environmental Policy’, Land Economics 73(4), 492–507.Google Scholar
  67. Yohe, G. W.: 1999, ‘The Tolerable Windows Approach: Lessons and Limitations’, Clim. Change 41 (3-4), 283–295.Google Scholar
  68. Yohe, G. W. and Wallace, R.: 1996, ‘Near Term Mitigation Policy for Global Change under Uncertainty: Minimizing the Expected Cost of Meeting Unknown Concentration Thresholds’, Environ. Model. Assess. 1(1-2), 47–58.Google Scholar
  69. Yohe, G.W.: 1997, ‘Uncertainty, Short Term Hedging and the TolerableWindow Approach’, Global Environ. Change 7 (4), 303–315.Google Scholar

Copyright information

© Kluwer Academic Publishers 2003

Authors and Affiliations

  • Richard S. J. Tol
    • 1
    • 2
    • 3
  1. 1.Center for Marine and Climate ResearchHamburg UniversityHamburgGermany
  2. 2.Institute for Environmental StudiesVrije UniversiteitAmsterdamthe Netherlands
  3. 3.Center for Integrated Study of the Human Dimensions of Global ChangeCarnegie Mellon UniversityPittsburghU.S.A

Personalised recommendations