Is the uncertainty about climate change too large for expected cost-benefit analysis?

Tol, Richard S J (2003) Is the uncertainty about climate change too large for expected cost-benefit analysis? Climatic Change, 56 (3). pp. 265-289. ISSN 1573-1480

Full text not available from this repository.

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 the FUND 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.

Item Type: Article
Schools and Departments: School of Business, Management and Economics > Economics
Subjects: G Geography. Anthropology. Recreation > GE Environmental Sciences > GE170 Environmental policy
H Social Sciences > HB Economic theory. Demography
Related URLs:
Depositing User: Richard Tol
Date Deposited: 19 Apr 2012 08:15
Last Modified: 19 Apr 2012 08:15
URI: http://sro.sussex.ac.uk/id/eprint/38363
📧 Request an update