Economics serving society

Models as usual for unusual risks? On the value of catastrophic risk climate change

Antoine Bommier, Bruno Lanz et Stéphane Zuber

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The most recent research into climate change reveals significant uncertainty about the increase in temperatures caused by the rise in the concentration of greenhouse gases (such as CO2) in the atmosphere; there is increasing reason, however, to fear an abrupt and irreversible change in the climate system. Such a change might be considered a “climate catastrophe” : the socio-economic change that would follow such a catastrophe is independent of contemporary actions and in particular, it is impossible to invest now to improve the situation afterwards. We can, then, define the social value of reducing catastrophic risks as the amount that society is collectively prepared to pay in order to reduce the possibility of catastrophe. Intuitively, this readiness to pay will depend on the collective aversion to catastrophic risks, but the usual cost-benefit analysis models do not take such aversion into account. In order to investigate, we can use a “muliplicative” model, one of whose characteristics is a loss of social well-being when individual risks are correlated (rather than independent), as occurs in catastrophic climate change.
In this article, Antoine Bommier, Bruno Lanz and Stéphane Zuber show that the multiplicative model generally involves a social value for the reduction of catastrophic risk around ten times higher than appears in the standard models. Using digital simulations, they show that this value has significant consequences for climate policies. In the case of limited catastrophic risk, they calculate that the multiplicative model demonstrates that much more stringent emission reductions are required in order to maintain a level of greenhouse gases less than twice as high as they were at the beginning of the industrial revolution, while the standard models recommend only weak emissions reductions. In the case of greater catastrophic risk (that is, 100 times more likely), the multiplicative model indicates the necessity of even more drastic emissions reductions in order to stabilise the concentration of greenhouse gases; the usual models on the other hand, suggest reductions similar to those suggested in the “limited” scenario of the multiplicative model, in which the risks are 100 times smaller. These results stress the importance of taking into account collective aversion to catastrophic change when designing climate policies. It also calls for further research to measure such an aversion.
Original title of the article: Models as usual for unusual risks? On the value of catastrophic risk climate change
Published in : Working paper CES 2014.17 - Avril 2014
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