Methodological recommendations for Ministries of Finance on climate change risk assessment and the enhancement of damage functions

• As even the best damage-function-based methods to estimate economic damages from climate change underestimate costs, it is prudent to put in place more stringent policies than those emerging from such calculations.
• Key aspects of substantial additional climate risk that voters and decision-makers will be concerned about that are either not represented or not fully included in damage functions include effects of extreme weather, biodiversity loss, ecosystem and Amazon rainforest collapse, and ice sheet collapse.
• Alternative methods to assess risk include quantification of physical/social risk metrics such as those made available in the Sixth Assessment Report of the Intergovernmental Panel on Climate Change.
• If damage functions are used despite the above concerns, it is important to select the most up-to-date, complete approaches and models. The Policy Analysis of Greenhouse Effect—Ice, Climate, Economics (PAGE-ICE) model is particularly useful, as it treats uncertainty well and incorporates discontinuities. The outputs are probabilistic, and the upper tails of the resulting estimates of climate-related risk should be used to inform policy decisions.

If economic CBA is felt by MoFs to be a necessary component of any analysis of a proposed climate policy, complementary approaches to CBA, such as risk assessment, should be used. Within this approach, any effort to quantify climate risk should use consistent assumptions about population growth, economic growth, and technological change. However, an assessment of the health co-benefits of climate change mitigation alone is likely to be sufficient to justify the investment. If so, this obviates the need to go through a complex risk assessment process.