Uncertainty and Global Warming: An Option-Pricing Approach to Policy

38 Pages Posted: 20 Apr 2016

See all articles by Marc Chesney

Marc Chesney

University of Zurich - Department of Banking and Finance

Andrea Baranzini

University of Applied Sciences Western Switzerland - Geneva School of Business Administration

Jacques P. Morisset

World Bank - Foreign Investment Advisory Service (FIAS)

Date Written: February 1995

Abstract

How does uncertainty about the extent of global warming affect decisionmaking to reduce it? Which policy options to choose and how long to delay implementing them?

Uncertainty is inherent in the analysis of global warming issues. Not only is there considerable scientific uncertainty about the magnitude of global warming, but even if that problem were resolved, there is uncertainty about what monetary value to assign to the costs and benefits of various policies to reduce global warming.

And yet the influence of uncertainty in policymakers' decisions is ignored in most studies of the issue.

Baranzini, Chesney, and Morisset try to explicitly incorporate the effect of uncertainty on the choice of global warming abatement policies. The approach they develop draws on the emerging literature on investment under uncertainty - in particular, that on the option-valuation approach.

Their numerical applications focus on Cline's (1992) analysis of global warming, but it may be applied to a range of global warming analyses.

First, they assess whether it is optimal to implement Cline's strategy of limiting global warming today, or whether it should be postponed, and for how long.

Then, they identify the optimal policy to be implemented today for different levels of uncertainty about the costs and benefits of policies to reduce global warming.

This paper - a product of the Country Operations Division, Latin America and the Caribbean, Country Department I - is part of a larger effort in the region to understand the role of uncertainty in environmental policy issues.

Suggested Citation

Chesney, Marc and Baranzini, Andrea and Morisset, Jacques P., Uncertainty and Global Warming: An Option-Pricing Approach to Policy (February 1995). World Bank Policy Research Working Paper No. 1417. Available at SSRN: https://ssrn.com/abstract=623900

Marc Chesney

University of Zurich - Department of Banking and Finance ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

HOME PAGE: http://https://www.bf.uzh.ch/en/persons/chesney-marc

Andrea Baranzini (Contact Author)

University of Applied Sciences Western Switzerland - Geneva School of Business Administration ( email )

CH-1227 Geneva
Switzerland
+41-22-388 1718 (Phone)
+41-22-388 1701 (Fax)

HOME PAGE: http://campus.hesge.ch/baranzia/

Jacques P. Morisset

World Bank - Foreign Investment Advisory Service (FIAS) ( email )

1818 H Street, NW
Washington, DC 20433
United States
202-473-0127 (Phone)
202-522-3262 (Fax)

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