What are robust strategies in the face of uncertain climate threshold responses?

Abstract

We use an integrated assessment model of climate change to analyze how alternative decision-making criteria affect preferred investments into greenhouse gas mitigation, the distribution of outcomes, the robustness of the strategies, and the economic value of information. We define robustness as trading a small decrease in a strategy’s expected performance for a significant increase in a strategy’s performance in the worst cases. Specifically, we modify the Dynamic Integrated model of Climate and the Economy (DICE-07) to include a simple representation of a climate threshold response, parametric uncertainty, structural uncertainty, learning, and different decision-making criteria. Economic analyses of climate change strategies typically adopt the expected utility maximization (EUM) framework. We compare EUM with two decision criteria adopted from the finance literature, namely Limited Degree of Confidence (LDC) and Safety First (SF). Both criteria increase the relative weight of the performance under the worst-case scenarios compared to EUM. We show that the LDC and SF criteria provide a computationally feasible foundation for identifying greenhouse gas mitigation strategies that may prove more robust than those identified by the EUM criterion. More robust strategies show higher near-term investments in emissions abatement. Reducing uncertainty has a higher economic value of information for the LDC and SF decision criteria than for EUM.