In a PPR Seminar, Geoffrey Heal discusses of the importance of analyzing uncertainty over climate change.
Existing economic analysis of climate change policy might not be accurate because it assumes too much certainty about the empirical effects of global warming.
When so much remains still uncertain about the climate system, its changes and effects, policymakers cannot use the usual economic models that rely on expected utility.
Professor Heal and his coauthors offer an alternative model for analyzing climate change, one that takes uncertainty – or what they refer to as ambiguity – directly into account. They build a model of decision making that factors in people’s aversion to ambiguity, finding that taking such aversion into account can significantly affect the value of climate change policy.
They conclude that “ambiguity aversion is plausibly a major driver of the economic case for abating greenhouse gas emissions.”