Toward an integrated framework derived from a risk-management approach to climate change

Abstract

Ackerman et al. (2009) criticize optimization applications of integrated assessment models of climate change on several grounds. First, they focus attention on contestable assumptions about the appropriate discount rate. Second, they worry that integrated assessment models base their damage estimates on incomplete information and questionable estimates of the value of human life and/or ecosystem services. Thirdly, they suggest that mitigation costs are systematically overestimated because they ignore technological innovation. So what good is economics in the climate arena? The authors suggest only one opportunity—investigate how the cost of achieving politically or hedging-based climate targets might be minimized. Their contribution provides a concise and internally consistent presentation of several sources of concern, but none is really new in their fundamental arguments. Antecedents of the points that they raise (and many others, for that matter) can be found in the established literature from the past 5 or 10 years; see, for example, Yohe (2003), Weitzman (2009) or Yohe and Tol (2008). This is not really a problem or a criticism for present purposes, though, because their discussion is so tightly articulated that it can be an effective springboard for discussions how improving economic analyses of climate change can do more than elaborate cost-minimizing strategies more thoroughly. On the one hand, dynamic cost–benefit frameworks cannot be discarded on the basis of what Ackerman, et al. or others say because official government agencies have not yet been convinced. Indeed, despite the now obvious concerns about the bases of estimates of the social cost of carbon derived from integrated assessment models, for example, such estimates are essential in bringing climate change to bear on a wide range of other policies and regulations. We cannot dismiss them, therefore; we must improve them and let practitioners know about their deficiencies. On the other hand, focusing on the economic underpinnings of risk-management techniques makes it clear that cost minimization is but of many roles for efficiency-based economic analysis.