Infinite uncertainty, forgotten feedbacks, and cost-benefit analysis of climate policy

Abstract

Tol (2003) questioned the applicability of expected cost-benefit analysis to global mitigation policy when he found evidence that the uncertainty surrounding estimates of the marginal damage of climate change could be infinite even if total damages were finite. Yohe (2003) suggested that this problem could be alleviated if international development aid were directed at eliminating the source of the problem - climate induced negative growth rates in a few regions along a handful of troublesome scenarios. The hypothesis about adding a second policy lever to the climate policy calculus is shown to hold, though perhaps not as robustly as originally thought. A portfolio of international policies with at least two independent tools can avoid infinite uncertainty on the margins and the associated implications for global mitigation policy at a reasonable price even in the relatively unlikely event that climate change causes negative economic growth in a region or two.