Agreeing on Robust Decisions: New Processes for Decision Making Under Deep Uncertainty

Investment decision making is already difficult for any diverse group of actors with different priorities and views. But the presence of deep uncertainties linked to climate change and other future conditions further challenges decision making by questioning the robustness of all purportedly optimal solutions. While decision makers can continue to use the decision metrics they have used in the past (such as net present value), alternative methodologies can improve decision processes, especially those that lead with analysis and end in agreement on decisions.

Fiscal Implications of Climate Change

This paper provides a primer on the fiscal implications of climate change, in particular the policies for responding to it. Many of the complicated challenges that arise in limiting climate change (through greenhouse gas emissions mitigation), and in dealing with the effects that remain (through adaptation to climate change impacts), are of a fiscal nature. While mitigation has the potential to raise substantial public revenue (through charges on greenhouse gas emissions), adaptation largely leads to fiscal outlays.

Getting Real about Adapting to Climate Change: Using ‘Real Options’ to Address the Uncertainties

Scientists predict that some climate change is already inevitable, even if greenhouse emissions are stabilised. Adaptation strategies will be of comparable importance to reducing emissions. However, the specific effects of climate change are currently unknowable, especially at the local level. Given this uncertainty, deterministic adaptation strategies are inappropriate.

Harmful are Adaptation Restrictions

The dominant assumption in economic models of climate policy remains that adaptation will be implemented in an optimal manner. There are, however, several reasons why optimal levels of adaptation may not be attainable. This paper investigates the effects of suboptimal levels of adaptation, i.e. adaptation restrictions, on the composition and level of climate change costs and on welfare. Several adaptation restrictions are identified and then simulated in a revised DICE model, extended with adaptation (AD-DICE).

Adaptation, flexibility and project decisionmaking with climate change uncertainties

Project planning in the future must directly address both climate change and uncertainties about it. This paper presents the use of classical decision criteria, such as maximin and minimax regret, and approaches for adapting to climate change given the uncertainties. Adaptation strategies can help reduce the effects of uncertainties by allowing for adjustments in designs as the future climate evolves, although at a cost for such future flexibility.

Preparing for catastrophic climate change.

We study optimal adaptation to climate change when the harmful consequences of globalwarming are associated with uncertain occurrence of abrupt changes. The adaptation policy entails the accumulation of a particular sort of capital that will eliminate or reduce the catastrophic damage of an abrupt climate change when (and if) it occurs. The occurrence date is uncertain. The policy problem involves balancing the tradeoffs between the (certain) investment cost prior to occurrence and the benefit (in reduced damage) that will be realized after the (uncertain) occurrence date.

Implications of a lowered damage trajectory for mitigation in a continuous-time stochastic model

We provide counterexamples to the idea that mitigation of greenhouse gas emissions, and adaptation to climate change, are always substitutes. We consider optimal mitigation policy when climate damages follow a geometric Brownian motion process with positive drift and mitigation is lumpy. Climate damages can be affected by adaptation in two main ways: 1) reduced proportionately for given climate impact; or 2) their growth path down-shifted. In either case expectation and variance of the climate damage are both reduced by adaptation.

Give and take: How the funding of adaptation to climate change can improve the donor’s terms-of-trade.

This paper discusses the interplay between international trade, regional adaptation to climate change and financial transfers for funding adaptation. It combines insights from a theoretical model of North-to-South transfers with the findings of a calibrated dynamic multi-region multi-sector computable general equilibrium model that takes into account the impacts of climate change and the adaptation to it. Assessing the effects of adaptation funding indicates that funding of adaptation in developing regions can be Pareto-improving.

Climate Change Policy: The Effect of Real Options Valuation on the Optimal Mitigation-Adaptation Balance

This paper illustrates the static optimisation strategies for climate change mitigation and adaptation using net marginal benefit analysis, and goes on to develop a dynamic optimisation solution using a modified Hotelling approach. Unfortunately, the situation required for a Hotelling-type optimisation to hold is rarely observed in practice, as there are numerous sources of uncertainty that impact upon a forward-looking optimisation exercise.

Informing climate adaptation: A review of the economic costs of natural disasters.

This paper reviews the empirical literature on the economic impacts of natural disasters to inform both the modeling of potential future climate damages and climate adaptation policy related to extreme events. It covers papers that estimate the short- and/or long-run economic impacts of weather-related extreme events as well as studies identifying the determinants of the magnitude of those damages (including fatalities). The paper also reviews the small number of empirical papers on the potential extent of adaptation in response to changing extreme events.