SEI Contact:

Frank Ackerman

Time-frame: 2011–2012

Project status: Closed

Modelling Risk in Climate Economics

Climate change involves uncertain probabilities of catastrophic risks, and very long-term consequences of current actions. Climate economics, therefore, is centrally concerned with the treatment of risk and time. Yet conventional assumptions about utility and optimal economic growth create a perverse connection between risk aversion and time preference, such that more aversion to current risks implies less concern for future outcomes, and vice versa. SEI set out to address this problem, adopting methods from the economics of finance. The result was a working paper, Epstein-Zin Utility in DICE: Is risk aversion irrelevant to climate policy? now submitted to an economics journal.