The Bias of Integrated Assessment Models that Ignore Climate Catastrophes
1 February 2012
By Dr. Noah Kaufman
Climate scientists predict there is a small but real possibility that climate change will lead to civilization-threatening catastrophic events. Economists and policymakers have used integrated assessment models (IAMs) to determine the optimal policy response to climate change. In this article from Climatic Change, NERA Consultant Dr. Noah Kaufman shows that these IAMs should not be used to determine an optimal price for carbon dioxide. Dr. Kaufman uses numerical simulations to estimate risk premiums toward climate catastrophes. Compared to the assumptions found in most IAMs, Dr. Kaufman's assumptions incorporate a more realistic range of uncertainty for both climate catastrophes and societal risk aversion into the model. The resulting range of risk premiums indicates that the conclusions drawn from IAMs that do not incorporate the potential for climate catastrophes are too imprecise to support any particular policy recommendation.
