Economics of Global Warming - Risk

Risk

One of the problems of climate change are the large uncertainties over the potential impacts of climate change, and the costs and benefits of actions taken in response to climate change, e.g., in reducing GHG emissions (Toth et al., 2001, p. 608). Two related ways of thinking about the problem of climate change decision-making in the presence of uncertainty are iterative risk management (Fisher et al., 2007; Yohe, 2010) and sequential decision making (Toth et al., 2001). Considerations in a risk-based approach might include, for example, the potential for low-probability, worst-case climate change impacts (Barker et al., 2007a).

An approach based on sequential decision making recognises that, over time, decisions related to climate change can be revised in the light of improved information (Goldemberg et al., 1996, p. 26). This is particularly important with respect to climate change, due to the long-term nature of the problem. A near-term hedging strategy concerned with reducing future climate impacts might favour stringent, near-term emissions reductions (Toth et al., 2001, pp. 612–613). Such an approach would allow for greater future flexibility with regard to a low stabilization target, e.g., 450 ppmv CO₂. To put it differently, stringent near-term emissions abatement can be seen as having an option value in allowing for lower, long-term stabilization targets. This option may be lost if near-term emissions abatement is less stringent.

On the other hand, a view may be taken that points to the benefits of improved information over time. This may suggest an approach where near-term emissions abatement is more modest (Defra/HM Treasury, 2005). Another way of viewing the problem is to look at the potential irreversibility of future climate change impacts (e.g., damages to ecosystems) against the irreversibility of making investments in efforts to reduce emissions (Goldemberg et al., 1996, p. 26; see also Economics of climate change mitigation#Irreversible impacts and policy).