Wrestling with Uncertainty in Climate Economic Models

71 Pages Posted: 27 Jul 2017 Last revised: 22 May 2019

See all articles by William A. Brock

William A. Brock

University of Wisconsin, Madison - Department of Economics; University of Missouri at Columbia - Department of Economics

Lars Peter Hansen

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: October 15, 2018

Abstract

This paper uses insights from decision theory under uncertainty to explore research challenges in climate economics. We embrace a broad perspective of uncertainty with three components: risk (probabilities assigned by a given model), ambiguity (level of confidence in alternative models), and misspecification (potential shortfalls in existing models). We survey recent climate science research that exposes the uncertainty in climate dynamics that is pertinent in economic analyses and relevant for using models to provide policy guidance. The uncertainty components and their implications for decision theory help us frame this evidence and expose the modeling and evidential challenges.

JEL Classification: G12, O44, Q51, Q54

Suggested Citation

Brock, William A. and Hansen, Lars Peter, Wrestling with Uncertainty in Climate Economic Models (October 15, 2018). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2019-71, Available at SSRN: https://ssrn.com/abstract=3008833 or http://dx.doi.org/10.2139/ssrn.3008833

William A. Brock (Contact Author)

University of Wisconsin, Madison - Department of Economics ( email )

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University of Missouri at Columbia - Department of Economics ( email )

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Lars Peter Hansen

University of Chicago - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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