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The Economics of Inaction on Climate Change: A Sensitivity Analysis
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The Economics of Inaction on Climate Change: A Sensitivity Analysis

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  • Frank Ackerman
  • Ian J. Finlayson

Abstract

Economic models of climate change often take the problem seriously, but paradoxically conclude that the optimal policy is to do almost nothing about it. We explore this paradox as seen in the widely used DICE model. Three aspects of that model, involving the discount rate, the assumed benefits of moderate warming, and the treatment of the latest climate science, are sufficient to explain the timidity of the model's optimal policy recommendation. With modifications to those three points, DICE shows that the optimal policy is a much higher and rapidly rising marginal carbon price; that higher carbon price has a greater effect on physical measures of climate impacts. Our modifications exhibit nonlinear interactions; at least at low discount rates, there is synergy between individual changes to the model. At low discount rates, the inherent uncertainty about future damages looms larger in the analysis, rendering long-run economic modeling less useful. Our analysis highlights the sensitivity of the model to three debatable assumptions; it does not, and could not, lead to a more reliably “optimal†cost of carbon. Cost-effectiveness analysis, focusing on the generally shorter-term cost side of the problem, reduces the economic paradoxes of the long run, and may make a greater contribution than economic optimization modeling.

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  • Frank Ackerman & Ian J. Finlayson, "undated". "The Economics of Inaction on Climate Change: A Sensitivity Analysis," GDAE Working Papers 06-07, GDAE, Tufts University.
    • Handle: RePEc:dae:daepap:06-07
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    Cited by:

    1. van den Bergh, J.C.J.M. & Botzen, W.J.W., 2015. "Monetary valuation of the social cost of CO2 emissions: A critical survey," Ecological Economics, Elsevier, vol. 114(C), pages 33-46.
    2. Brian Roach, "undated". "Policies for Funding a Response to Climate Change," GDAE Working Papers 08-03, GDAE, Tufts University.
    3. Ackerman, Frank & Stanton, Elizabeth A. & Bueno, Ramón, 2010. "Fat tails, exponents, extreme uncertainty: Simulating catastrophe in DICE," Ecological Economics, Elsevier, vol. 69(8), pages 1657-1665, June.
    4. Ackerman, Frank & Stanton, Elizabeth A. & Hope, Chris & Alberth, Stephane, 2009. "Did the Stern Review underestimate US and global climate damages?," Energy Policy, Elsevier, vol. 37(7), pages 2717-2721, July.
    5. Ackerman, Frank & Stanton, Elizabeth A., 2006. "Can Climate Change Save Lives? A comment on “Economy-wide estimates of the implications of climate change: Human health"," Working Papers 37240, Tufts University, Global Development and Environment Institute.
    6. Nir Y. Krakauer, 2014. "Economic Growth Assumptions in Climate and Energy Policy," Sustainability, MDPI, vol. 6(3), pages 1-14, March.
    7. Frank Ackerman & Elizabeth Stanton, "undated". "Can Climate Change Save Lives? A comment on “Economy-wide estimates of the implications of climate change: Human health," GDAE Working Papers 06-05, GDAE, Tufts University.
    8. Elizabeth A. Stanton & Frank Ackerman, 2009. "Climate and development economics: Balancing science, politics and equity," Natural Resources Forum, Blackwell Publishing, vol. 33(4), pages 262-273, November.
    9. Nelson, Julie A., 2008. "Economists, value judgments, and climate change: A view from feminist economics," Ecological Economics, Elsevier, vol. 65(3), pages 441-447, April.
    10. Nelson, J.A., 2013. "Ethics and the economist: What climate change demands of us," Ecological Economics, Elsevier, vol. 85(C), pages 145-154.
    11. Alatorre, José Eduardo & Peres Núñez, Wilson & Bárcena Ibarra, Alicia & Samaniego, Joseluis, 2020. "The climate emergency in Latin America and the Caribbean: The path ahead – resignation or action?," Libros de la CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), number 45678 edited by Eclac.
    12. Rick Baker & Andrew Barker & Alan Johnston & Michael Kohlhaas, 2008. "The Stern Review: an assessment of its methodology," Staff Working Papers 0801, Productivity Commission, Government of Australia.

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