Research Publication

Abstract:

This paper explores how uncertainty, as it pertains to climate change challenges, operates through multiple channels and has impacts for the timing of responses. We use decision theory to embrace a broad notion of uncertainty and highlight its significance for forming robustly optimal policies. These prudent policies depend on social valuations such as the social cost of climate change and the social value of research and development. Drawing insights from stochastic response theory and asset pricing, we assess when and why enhanced uncertainty concerns have important consequences for social valuation and lead to more proactive policy approaches to climate change.

Associated Notebook

Keywords— uncertainty, climate policy, research and development, real options theory.

Acknowledgments: 

This paper is an outgrowth of a previously circulated document entitled, “How Should Climate Change Uncertainty Impact Social Valuation and Policy?” The authors thank Pengyu Chen, Adlai Fisher, Peter Hansen, Joanna Harris, Chun Hei Hung, Cosmin Ilut, Hagen Kim, Aleksei Oskolkov, Stavros Panageas, Diana Petrova, Eric Renault, Grace Tsiang, Noah Williams, and Judy Yue for helpful suggestions and Pengyu Chen, Bin Cheng, Zhaoyang Xu, and Jiaying (Jessie) Liao for the exceptional research assistance. In addition, participants at the 2023 SITE Conference on Climate Finance, Innovation, and Challenges for Policy, the 2024 NBER Spring Asset Pricing Meeting, the 2024 Texas A&M Young Scholar Finance Consortium, and the 2024 SFS Cavalcade Annual Meeting provided valuable feedback. An editor and three referees provided valuable feedback on an earlier version of this paper. We supply an online notebook with supplemental results and the code used to derive our model solutions at https://climatesocialpolicy.readthedocs.io/en/latest/index.html. This research was supported in part by the University of Chicago Kenneth C. Griffin Economics Incubator, the Haddad Fund for Economics Research at the Becker Friedman Institute for Economics at the University of Chicago and the Climate Systems Engineering initiative (CSEi) at the University of Chicago. Hansen is also grateful to the Research Computing Center at the University of Chicago for providing computational resources. 

@article{barnett2024uncertainty,
  title={Uncertainty, Social Valuation, and Climate Change},
  author={Barnett, Michael L and Brock, William A and Zhang, Hong and Hansen, Lars Peter},
  journal={University of Chicago, Becker Friedman Institute for Economics Working Paper},
  number={2024-75},
  year={2024}
}