Integrated assessment models (IAMs) are cross-disciplinary tools that explore how economic activity interacts with the environment and vice versa. They differ in their design and scope and are frequently used by the Intergovernmental Panel on Climate Change (IPCC), national environmental agencies and others to assess the economic consequences of climate change. One particular group of IAMs goes as far as estimating the total economic effect of climate change, which includes three essential components: costs of emissions abatement, costs of adaptation to changing climate, and residual impacts on the economy. The most prominent models in this group, the Dynamic Integrated Model of Climate and the Economy (DICE), Climate Framework for Uncertainty, Negotiation and Distribution (FUND) and Policy Analysis of the Greenhouse Effect (PAGE), follow a commonly adopted approach to use empirical damage functions as a way of translating climate-driven environmental changes into the economic impacts, which could be either costs or benefits. The chapter explores how damage functions are constructed and calibrated in these three IAMs by examining model documentation, and summarizes the limitations of the current approaches. It then reflects on how damage functions could be improved in order to help build confidence in these IAMs, and ultimately to provide better estimates of the impacts of climate change for decision-makers and academics.
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