Skip to main content
SpringerLink
Log in

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

  • Published:
Climatic Change Aims and scope Submit manuscript

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.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Alcamo, J. and Kreileman, G. J. J.: 1996a, ‘Emission Scenarios and Global Climate Protection’, Global Environ. Change 6(4), 305–334.

    Google Scholar 

  • 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 

  • Batjes, J. J. and Goldewijk, C. G. M.: 1994, The IMAGE 2 Hundred Year (1890–1990) Database of the Global Environment (HYDE), 410100082, RIVM, Bilthoven.

    Google Scholar 

  • Burton, I., Kates, R.W., and White, G. F.: 1993, The Environment as Hazard, 2nd edn., The Guilford Press, New York.

    Google Scholar 

  • 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 

  • Dowlatabadi, H.: 1999, ‘Climate Change Thresholds and Guardrails for Emissions’, Clim. Change 41(3-4), 297–301.

    Google Scholar 

  • Eismont, O. and Welsch, H.: 1996, ‘Optimal Greenhouse Gas Emissions under Various Assessments of Climate Change Ambiguity’, Environ. Resour. Econ.

  • 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 

  • 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 

  • Hammitt, J. K.: 1995, ‘Outcome and Value Uncertainty in Global-Change Policy’, Clim. Change 30, 125–145.

    Google Scholar 

  • 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 

  • 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 

  • 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 

  • 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 

  • 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 

  • 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 

  • 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.

  • Leimbach, M.: 1996,‘Development of a Fuzzy Optimization Model, Supporting Global Warming Decision-Making’, Environ. Resour. Econ. 7 163–192.

    Google Scholar 

  • 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 

  • Lind, R. C. (ed.): 1982, Discounting for Time and Risk in Energy Policy, Resources for the Future, Washington, D.C.

    Google Scholar 

  • Maddison, D. J.: 1995, ‘A Cost-Benefit Analysis of Slowing Climate Change’, Energy Policy 23(4/5), 337–346.

    Google Scholar 

  • 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 

  • 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 

  • 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 

  • 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 

  • 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 

  • Morgan, M. G. and Keith, D. W.: 1995, ‘Subjective Judgments by Climate Experts’, Environmental Science and Technology 29(10), 468A–476A.

    Google Scholar 

  • Nordhaus, W. D.: 1991, ‘To Slow or Not to Slow: The Economics of the Greenhouse Effect’, Economic Journal 101, 920–937.

    Google Scholar 

  • Nordhaus, W. D.: 1992, ‘An Optimal Transition Path for Controlling Greenhouse Gases’, Science 258, 1315–1319.

    Google Scholar 

  • Nordhaus, W. D.: 1993, ‘Rolling the “DICE”: An Optimal Transition Path for Controlling Greenhouse Gases’, Resource and Energy Economics 15, 27–50.

    Google Scholar 

  • Nordhaus, W. D.: 1994a, ‘Expert Opinion on Climate Change’, American Scientist, 45–51.

  • Nordhaus, W. D.: 1994b, Managing the Global Commons: The Economics of Climate Change, The MIT Press, Cambridge.

    Google Scholar 

  • 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 

  • 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 

  • Pate-Cornell, E.: 1996, ‘Uncertainties in Global Climate Change Estimates’, Clim. Change 33, 145–149.

    Google Scholar 

  • 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 

  • Peck, S. C. and Teisberg, T. J.: 1992, ‘CETA: AModel for Carbon Emissions Trajectory Assessment’, Energy J. 13(1), 55–77.

    Google Scholar 

  • 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 

  • 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 

  • 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 

  • 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 

  • 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 

  • Raiffa, H.: 1970, Decision Analysis: Introductory Lectures on Choices under Uncertainty, Addison-Wesley, Reading.

    Google Scholar 

  • Schimmelpfennig, D.: 1996, ‘Uncertainty in Economic Models of Climate Change Impacts’, Clim. Change 33, 213–234.

    Google Scholar 

  • Schlaifer, R.: 1978, Analysis of Decisions under Uncertainty, Robert E. Krieger Publishing, Huntington.

    Google Scholar 

  • 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 Change — The IPCC Scientific Assessment, 1st edn., Cambridge University Press, Cambridge, pp. 41–68.

    Google Scholar 

  • Starrett, D.: 1988, Foundations of Public Economics, Cambridge University Press, Cambridge.

    Google Scholar 

  • Tol, R. S. J.: 1995, ‘The Damage Costs of Climate Change Toward more Comprehensive Calculations’, Environ. Resour. Econ. 5, 353–374.

    Google Scholar 

  • Tol, R. S. J.: 1996, ‘The Damage Costs of Climate Change Towards a Dynamic Representation’, Ecological Economics 19, 67–90.

    Google Scholar 

  • 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 

  • Tol, R. S. J.: 1998a, ‘Kyoto Mistakes’, International Journal of Environment and Pollution 10(3/4), 503–507.

    Google Scholar 

  • 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 

  • 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 

  • Tol, R. S. J.: 1999b, ‘Spatial and Temporal Efficiency in Climate Change: Applications of FUND’, Environ. Resour. Econ. 14(1), 33–49.

    Google Scholar 

  • 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.

  • Tol, R. S. J.: 1999d, ‘Safe Policies in an Uncertain Climate: An Application of FUND’, Global Environ. Change 9, 221–232.

    Google Scholar 

  • Tol, R. S. J.: 1999e, ‘The Marginal Costs of Greenhouse Gas Emissions’, Energy J. 20(1), 61–81.

    Google Scholar 

  • 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 

  • 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 

  • 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 

  • 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 

  • 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.

  • 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 Gaps — Proceedings 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 

  • Ulph, A. and Maddison, D. J.: 1997, ‘Uncertainty, Learning and International Environmental Policy Coordination’, Environ. Resour. Econ. 9 451–466.

    Google Scholar 

  • Welsch, H.: 1995, ‘Greenhouse Gas Abatement under Ambiguity’, Energy Economics 17(2), 91–100.

    Google Scholar 

  • 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 

  • Yohe, G. W.: 1999, ‘The Tolerable Windows Approach: Lessons and Limitations’, Clim. Change 41 (3-4), 283–295.

    Google Scholar 

  • 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 

  • Yohe, G.W.: 1997, ‘Uncertainty, Short Term Hedging and the TolerableWindow Approach’, Global Environ. Change 7 (4), 303–315.

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Center for Marine and Climate Research, Hamburg University, Hamburg, Germany

    Richard S. J. Tol

  2. Institute for Environmental Studies, Vrije Universiteit, De Boelelaan 1115, 1081 HV, Amsterdam, the Netherlands

    Richard S. J. Tol

  3. Center for Integrated Study of the Human Dimensions of Global Change, Carnegie Mellon University, Pittsburgh, PA, U.S.A

    Richard S. J. Tol

Authors
  1. Richard S. J. Tol
    View author publications

    You can also search for this author in PubMed Google Scholar

Rights and permissions

Reprints and permissions

About this article

Cite this article

Tol, R.S.J. Is the Uncertainty about Climate Change too Large for Expected Cost-Benefit Analysis?. Climatic Change 56, 265–289 (2003). https://doi.org/10.1023/A:1021753906949

Download citation

  • Issue Date:

  • DOI: https://doi.org/10.1023/A:1021753906949

Keywords

Search

Navigation