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Operationalizing climate targets under learning: An application of cost-risk analysis

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  • Delf Neubersch
  • Hermann Held
  • Alexander Otto
Abstract
Cost-Effectiveness Analysis (CEA) determines climate policies that reach a given climate target at minimum welfare losses. However, when applied to temperature targets under climate sensitivity uncertainty, decision-makers might be confronted with normatively unappealing negative expected values of future climate information or even infeasible solutions. To tackle these issues, Cost-Risk Analysis (CRA), that trades-off the costs for mitigating climate change against the risk of exceeding climate targets, has been proposed as an extension of CEA under uncertainty. Here we build on this proposition and develop an axiomatically sound CRA for the context of uncertainty and future learning. The main contributions of this paper are: (i) we show, that a risk-penalty function has to be non-concave to avoid counter-intuitive preferences, (ii) we introduce a universally applicable calibration of the cost-risk trade-off, and (iii) we implement the first application of CRA to a numerical integrated assessment model. We find that for a 2°-target in combination with a 66 % compliance level, the expected value of information in 2015 vs. 2075 is between 0.15 % and 0.66 % of consumption every year, and can reduce expected mitigation costs by about one third. (iv) Finally, we find that the relative importance of the economic over the risk-related contribution increases with the target probability of compliance. Copyright The Author(s) 2014

Suggested Citation

  • Delf Neubersch & Hermann Held & Alexander Otto, 2014. "Operationalizing climate targets under learning: An application of cost-risk analysis," Climatic Change, Springer, vol. 126(3), pages 305-318, October.
    • Handle: RePEc:spr:climat:v:126:y:2014:i:3:p:305-318
    DOI: 10.1007/s10584-014-1223-z
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    3. Elnaz Roshan & Mohammad M. Khabbazan & Hermann Held, 2019. "Cost-Risk Trade-Off of Mitigation and Solar Geoengineering: Considering Regional Disparities Under Probabilistic Climate Sensitivity," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 72(1), pages 263-279, January.
    4. Luke G. Fitzpatrick & David L. Kelly, 2017. "Probabilistic Stabilization Targets," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 4(2), pages 611-657.
    5. Schreyer, Felix & Held, Hermann, 2020. "How to formulate climate targets under uncertainty and anticipated future learning about climate sensitivity? – An axiomatic review of the strong sustainability paradigm," WiSo-HH Working Paper Series 54, University of Hamburg, Faculty of Business, Economics and Social Sciences, WISO Research Laboratory.
    6. Johannes Emmerling & Massimo Tavoni, 2018. "Climate Engineering and Abatement: A ‘flat’ Relationship Under Uncertainty," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 69(2), pages 395-415, February.
    7. Mohammad M. Khabbazan, 2022. "Cost-Risk Analysis Reconsidered—Value of Information on the Climate Sensitivity in the Integrated Assessment Model PRICE," Energies, MDPI, vol. 15(11), pages 1-17, June.
    8. Held, Hermann, 2020. "Cost Risk Analysisː How Robust Is It in View of Weitzman's Dismal Theorem and Undetermined Risk Functions?," WiSo-HH Working Paper Series 55, University of Hamburg, Faculty of Business, Economics and Social Sciences, WISO Research Laboratory.
    9. Reyer Gerlagh & Thomas Michielsen, 2015. "Moving targets—cost-effective climate policy under scientific uncertainty," Climatic Change, Springer, vol. 132(4), pages 519-529, October.
    10. Stein, Lukas & Khabbazan, Mohammad Mohammadi & Held, Hermann, 2020. "Replacing temperature targets by subsidiary targetsː How accurate are they? – Overshooting vs. economic losses," WiSo-HH Working Paper Series 57, University of Hamburg, Faculty of Business, Economics and Social Sciences, WISO Research Laboratory.
    11. Mohammad M. Khabbazan & Sascha Hokamp, 2022. "Decarbonizing the Global Economy—Investigating the Role of Carbon Emission Inertia Using the Integrated Assessment Model MIND," Economies, MDPI, vol. 10(8), pages 1-19, July.
    12. Roth, Robert & Neubersch, Delf & Held, Hermann, 2020. "Evaluating Delayed Climate Policy by Cost-Risk Analysis," WiSo-HH Working Paper Series 53, University of Hamburg, Faculty of Business, Economics and Social Sciences, WISO Research Laboratory.

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