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Uncertainty and Climate Change Policy

Uncertainty is a pervasive feature of climate change analysis. This paper explores the consequences for policymakers. Importantly, uncertainty means that every policy has a range of possible outcomes rather than a single estimate. At a minimum, this requires policymakers to decide how to compare these different outcomes and to determine the likelihood that each outcome occurs. While objective analyses help with this task, subjective assessment by the policymaker is inevitable. Applying this approach to climate change policy, a climate-economy model is used to assess the impact of uncertainty on policy choice. Uncertainty is found to increase the desired policy stringency and leads to a preference for taxes over permits. Surprisingly, economic uncertainty – specifically concerning future discount rates – drives these results rather than climate uncertainty. In addition to these direct policy consequences, uncertainty also interacts with other issues. In particular, it raises the question of how new information will be acquired and how the planned course of action may change. Irreversibilities in capital, CO 2 concentrations and technology require special attention in order to preserve the option to revise policy in the future. Without specifying the direction of the perceived risk, however, their net consequence for policy remains ambiguous.