Climate Policy Decisions Under Uncertainty

The economics of global climate mitigation is discussed when there is imperfect knowledge of future climatic changes, of policy effectiveness and of the policy responses by different countries. Uncertainty is accounted for by using heuristics derived from classical decision rules. These heuristics provide plausible policy rules that depend on only limited information. They emphasize the possibility of “getting it wrong” in terms of the appropriate scale of policy response and from policy failure itself. The minimax rule or Precautionary Principle, which targets “worst case” situations, is not useful unless policies are effective with certainty. However the widespread presumption that policy action is warranted if climate-induced losses without action are “large” relative to costs of policy can be justified using minimax regret reasoning. The global analysis is extended to individual national decision-making when nations jointly play a game against nature with policy spillovers. Simultaneous moves game solutions as well as heuristics are provided and indicate how policy actions are best determined for individual countries rather than for a global authority