Equity, Efficiency, Uncertainty, and the Mitigation of Global Climate Change

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Abstract:

Policies to mitigate potential damages from global climate change impose costs on the current generation to provide benefits to future generations. This article examines how comparisons among three stylized policies — business-as-usual, mitigation of climate change, and compensation for climate damages — depend on social preferences with respect to risk and intertemporal equity. Also examined is the opportunity-cost criterion, which asserts that mitigation should not be chosen if its net present value is smaller than that of business-as-usual. Analysis reveals that the discount factor used to evaluate whether mitigation satisfies this criterion depends on preferences regarding risk and intertemporal inequality of consumption, and on the risk of the compensation policy. Risk aversion favors mitigation over business-as-usual. If society is neutral to inequality, risk aversion disfavors compensation, but if society is inequality averse, the effect of risk aversion on preferences between compensation and business-as-usual is ambiguous. Inequality aversion tends to favor business-as-usual over both alternative policies provided that, roughly speaking, the anticipated future improvements in welfare exceed the anticipated climate damages.

Keywords: Discounting; inequality aversion; opportunity cost; risk aversion

Document Type: Original Article

DOI: http://dx.doi.org/10.1111/0272-4332.206078

Affiliations: Center for Risk Analysis, Harvard School of Public Health, Boston, MA.

Publication date: December 1, 2000

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