Model Uncertainty in Climate Change Economics: A Review and Proposed Framework for Future Research
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Model Uncertainty in Climate Change Economics: A Review and Proposed Framework for Future Research Loïc Berger1,2 · Massimo Marinacci3 Accepted: 4 August 2020 © Springer Nature B.V. 2020
Abstract We review recent models of choices under uncertainty that have been proposed in the economic literature. In particular, we show how different concepts and methods of economic decision theory can be directly useful for problems in environmental economics. The framework we propose is general and can be applied in many different fields of environmental economics. To illustrate, we provide a simple application in the context of an optimal mitigation policy under climate change. Keywords Ambiguity · Non-expected utility · Model uncertainty · Climate change JEL Classification D81 · Q54
1 Introduction Uncertainty is pervasive in most decision problems, but is of particular importance when considering decisions with global, long-lasting and potentially irreversible consequences. Such are the decisions that cope with the environmental challenge of global climate change, which have to be made in the presence of uncertainty about both the science of climate and some basic socio-economic and technology drivers. There is a growing awareness that the uncertainty encountered when dealing with problems such as climate change goes well beyond the classical notion of “risk” typically used by economists. Put simply, the term risk refers to situations in which the probabilities of This work was supported by the AXA Chair in Risk at Bocconi University, the European Research Council (ERC) under the European Union’s [Seventh Framework Programme (FP7-2007-2013)] (Grant Agreement No. 336703) and [Horizon 2020 research and innovation programme] (Grant Agreement No. 670337), and the French Agence Nationale de la Recherche (ANR), under Grants ANR-17CE03-0008-01. * Loïc Berger [email protected] 1
CNRS, IESEG School of Management, Univ. Lille, UMR 9221 - LEM, 59000 Lille, France
2
RFF‑CMCC European Institute on Economics and the Environment (EIEE), Centro EuroMediterraneo sui Cambiamenti Climatici, 20123 Milan, Italy
3
Department of Decision Sciences and IGIER, Universita Bocconi, 20136 Milan, Italy
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events’ occurrence are known, while the notion of uncertainty is broader and refers to situations in which this may not be the case. Most decisions indeed must be made in situations in which some events do not have an obvious, unanimously agreed-on, probability assignment. This might be because too little information is available or because different predictions exist, resulting from different models or datasets, or from different experts’ opinions. The evaluation of climate policy is generally performed using decision criteria that, like the standard expected utility theory criterion developed by von Neumann and Morgenstern (1947) and Savage (1954), do not distinguish between risk and uncertainty but actually reduce any kind of uncertainty to risk. As the treatment of uncertainty has recent
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