Building Uncertainty into the Adaptation Cost Estimation in Integrated Assessment Models

32 Pages Posted: 12 Mar 2016

See all articles by Anil Markandya

Anil Markandya

Basque Centre for Climate Change (BC3); University of Bath

Enrica De Cian

Fondazione Eni Enrico Mattei (FEEM); CMCC - Centro Euro-Mediterraneo sui Cambiamenti Climatici

Laurent Drouet

Fondazione Eni Enrico Mattei (FEEM)

Josué Polanco-Martìnez

BC3-Basque Centre for Climate Change

Francesco Bosello

University of Milan - Department of Economics, Business and Statistics; CMCC - Centro Euro-Mediterraneo sui Cambiamenti Climatici

Date Written: March 10, 2016

Abstract

This paper proposes an operationally simple and easily generalizable methodology to incorporate climate change damage uncertainty into Integrated Assessment Models (IAMs). Uncertainty is transformed into a risk-premium, damage-correction, region-specific factor by extracting damage distribution means and variances from an ensemble of socio economic and climate change scenarios. This risk premium quantifies what society would be willing to pay to insure against the uncertainty of the damages, and it can be considered an add-up to the standard “average damage”. Our computations show the addition to be significant, but highly sensitive to the coefficient of relative risk aversion. Once the climate change damage function incorporates the risk premium into the model, results show a substantial increase in both mitigation and adaptation, reflecting a more conservative attitude by the social planner. Interestingly, adaptation is stimulated more than mitigation in the first half of the century, while the situation reverses afterwards. Over the century, the risk premium correction fosters more mitigation, which doubles, than adaptation, which rises by about 80%.

Keywords: Risk, Uncertainty, Climate, Adaptation, Mitigation

JEL Classification: Q2, Q3, D8, D9, D62

Suggested Citation

Markandya, Anil and De Cian, Enrica and Drouet, Laurent and Polanco-Martìnez, Josué and Bosello, Francesco, Building Uncertainty into the Adaptation Cost Estimation in Integrated Assessment Models (March 10, 2016). FEEM Working Paper No. 021.2016; CMCC Research Paper No. 267. Available at SSRN: https://ssrn.com/abstract=2745825 or http://dx.doi.org/10.2139/ssrn.2745825

Anil Markandya

Basque Centre for Climate Change (BC3)

Gran Vía 35-2
Bilbao, Vizcaya 48009
Spain

University of Bath ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

Enrica De Cian (Contact Author)

Fondazione Eni Enrico Mattei (FEEM) ( email )

Campo S. M. Formosa, Castello 5252
Venice, 30122
Italy

CMCC - Centro Euro-Mediterraneo sui Cambiamenti Climatici ( email )

via Augusto Imperatore, 16
Lecce, I-73100
Italy

Laurent Drouet

Fondazione Eni Enrico Mattei (FEEM) ( email )

C.so Magenta 63
Milano, 20123
Italy

Josué Polanco-Martìnez

BC3-Basque Centre for Climate Change ( email )

Alameda Urquijo 4, 4th floor Bilbao
Bilbao, 48008
Spain

Francesco Bosello

University of Milan - Department of Economics, Business and Statistics

Via Festa del Perdono, 7
Milan, 20122
Italy

CMCC - Centro Euro-Mediterraneo sui Cambiamenti Climatici

via Augusto Imperatore, 16
Lecce, I-73100
Italy

Register to save articles to
your library

Register

Paper statistics

Downloads
35
Abstract Views
466
PlumX Metrics