Uncertainty about how climate change will impact economies is a major challenge for economic modeling that has not yet been resolved.
It is challenging due to the difficulty of quantifying the uncertainty of, e.g., different climate futures, technological progress, and policy. However, given the uncertainty in the real world, models that do not incorporate it may yield biased results.
- Quantifying the impacts of uncertainty might change the timing of optimal climate policies. This is especially important because simple economic models with discounting often find that the optimal policy is to delay action.
- Models that assume agents have perfect foresight about climate scenarios will tend to underestimate the impacts of the transition; agents making optimal decisions under uncertainty will tend to delay decisions or choose investments with shorter time horizons.
- Policies that reduce uncertainty and achieve policy objectives in all future conditions will be more beneficial than policies that need to be fine-tuned to future conditions.
- Strong climate action taken early, that decreases the likelihood of extreme climate futures, will reduce uncertainty and benefit the macroeconomy.
A useful next step would be to create and maintain a database of potential climate scenarios that includes estimates of their likelihood under different assumptions about global climate mitigation actions. This would enable probabilities to be attached to sensitivity analysis and would support better recommendations to policymakers.
Keywords
modelsphysical riskscenariostechnologyuncertainty
