Linking predictive climate models to economic assessments under conditions of uncertainty

Linking predictive climate models to economic assessments under conditions of uncertainty can lead to methodological complications that have only recently been recognized. In particular, appropriate methods and rates of discounting future benefits change under uncertainty relative to situations in which the future is assumed to be known. The appropriate discount rate may be substantially higher or lower than values commonly used, depending on the specific case and preference axioms employed. For an issue such as climate change, in which the benefits of policy decisions extend over a long time horizon, small changes in discount rates can have dramatic implications for the optimal choice of policy. Clarifying and demonstrating the ramifications of model uncertainty for linked economic analyses is a major objective of this interdisciplinary research effort.

Faculty contact: Mark E. Borsuk