Research Publication

December 2020 | Working Paper

How Should Climate Change Uncertainty Impact Social Valuation and Policy?

Michael Barnett, William Brock, and Lars Peter Hansen

Abstract

The design and conduct of climate change policy necessarily confronts uncertainty along multiple fronts. We explore the consequence of ambiguity over various sources and configura-tions of models that impact how economic opportunities could be damaged in the future. We take inventory of three alternative sources of uncertainty and provide a novel way to assess it. These include i) carbon dynamics that capture how carbon emissions impact atmospheric carbon in future time periods; ii) temperature dynamics that depict how atmospheric carbon alters temperature in future time periods; iii) damage functions that quantify how temperature changes diminish economic opportunities. We show how uncertainty sources interact for a social planner looking to design a prudent approach to the social pricing of carbon emissions. Our uncertainty decompositions, which are disciplined by quantitative geoscientific modeling of the first two channels and quantitative economic modelling of the third, provide guidance to where resources should be allocated towards uncertainty reduction. Decision theory under ambiguity provides a framework for our economically motivated approach to uncertainty quantification.

Tags: Climate, Uncertainty|