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New approaches to decision-making under uncertainty in the economics of climate change Simon Dietz Director, ESRC Centre for Climate Change Economics and Policy Co-Director, Grantham Research Institute Examples of economic decisions that depend on climate predictions • Investment in flood defence and other means of adapting to climate change • Investment in weather-sensitive methods of energy supply, e.g. wind and nuclear • Growing new markets for insurance against weather • National and global greenhouse gas emissions reductions targets Examples of economic decisions that depend on climate predictions • Investment in flood defence and other means of adapting to climate change • Investment in weather-sensitive methods of energy supply, e.g. wind and nuclear • Growing new markets for insurance against losses from extreme weather • National and global greenhouse gas emissions reductions targets In the beginning… Source: Nordhaus (1993) Probabilities and expected utility 2050 0 2100 2150 2200 % loss in GDP per capita -5 -10 -11.3 -15 -20 -25 -30 Baseline Climate, market impacts + risk of catastrophe + non-market impacts 5 - 95% impacts range -35 Source: Stern (2007) But are our climate predictions of sufficient quality to sustain expected utility approaches? Source: Malte Meinshausen Never mind about climate change, what about our predictions of its economic consequences? Source: Tol (2012) in Env. & Res. Econ. An alternative: the smooth model of decision making under ambiguity 2nd order probabilities 1st order probabilities … Another alternative: robust control max min Some concluding thoughts • Recent developments have enabled research into the economics of climate change to be more realistic and sophisticated about uncertainty – But realistic and sophisticated enough? • Policy relevance: general or specific? – Confirming the precautionary motive behind emissions targets – Some specific lessons for adaptation, e.g. real options story tends to warn against hasty investment in climate-proofing infrastructure