Chapter 5: Some Basic Economics of Extreme Climate Change
Martin L. Weitzman INTRODUCTION Four big questions often asked about climate change are: (i) how much global warming and climate change will occur; (ii) how bad will it get; (iii) when will all this occur; and (iv) what should be done about it? This chapter attempts to explain why science and economics cannot resolve these questions to anywhere near the degree of accuracy that we have come to expect from more traditional applications of cost–benefit analysis (CBA), because there is so much deep structural uncertainty associated with climate change. The ‘unknown unknowns’ of climate change make CBA significantly more fuzzy in this arena than in more traditional applications, such as constructing roads, strengthening bridges or setting building codes in earthquake-prone zones. The chapter tries to make sense of this anomalous situation and explores what might be done in terms of actionable alternatives under such fuzzy circumstances. Climate change is so complicated, and it involves so many sides of so many different disciplines and viewpoints, that no analytically tractable model or paper can aspire to illuminate more than a few facets of the problem. Because the problem is so complex, economists typically resort to numerical computer simulations. An integrated assessment model (IAM) for climate change is a multi-equation computerized model linking aggregate economic growth with simple climate dynamics in order to analyse the economic impacts of global warming. An IAM is essentially a dynamic model of an economy with a controllable greenhouse-gas-driven externality of endogenous greenhouse warming. IAMs have proven...
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