Rossella Bargiacchi Contact: R.Bargiacchi@uvt.nl Climate Change Scenarios and the Precautionary Principle Forthcoming in: Risk and Uncertainty in Environmental and Resource Economics, J.Wesseler, H.P.Weikard and R.Weaver eds., Edward Elgar Rossella Bargiacchi Contact: R.Bargiacchi@uvt.nl Rossella Bargiacchi

Climate Change Scenarios and the Precautionary Principle Preliminary considerations: Climate change is real ( ? ) Emission reduction is the only possibility for prevention (alternative: artificial carbon sinks - not operative, to my knowledge) The relations between emissions, climate change, and economic damage are uncertain and may be discontinuous (thresholds) Emission reduction is costly Rossella Bargiacchi

Climate Change Scenarios and the Precautionary Principle Research questions: What is the optimal level of emission reduction? Are decision makers likely to achieve such level in reality? Rossella Bargiacchi

Climate Change Scenarios and the Precautionary Principle Structure of presentation: Introduction and characterization of scenarios Derivation of a utility function within a scenario Models of choice of optimal emission levels Simulations and results Conclusions Rossella Bargiacchi

Climate Change Scenarios and the Precautionary Principle Scenarios are descriptions of possible future developments of a set of variables (demographic, economic, and environmental variables) => treat scenarios as special states of the world, each representing some combination of hypotheses about interactions between climate and economy Rossella Bargiacchi

Climate Change Scenarios and the Precautionary Principle Utility within a scenario presents thresholds: c: consumption B: location of the threshold α: impact of crossing the threshold u(c): utility v(B-c): environmental amenity Rossella Bargiacchi

Climate Change Scenarios and the Precautionary Principle 1-l1(α) =1-l3(α) 1-l2(α) Rossella Bargiacchi

Climate Change Scenarios and the Precautionary Principle Models of choice in the face of uncertainty Rationality benchmark: Expected Utility theory (EU) Descriptive benchmark: Rank Dependent Utility theory (RDU) with inverse-S shaped transformation function Proposed model: RDU with convex weighting function Rossella Bargiacchi

Climate Change Scenarios and the Precautionary Principle In 1992 the United Nations stated the so-called Precautionary Principle: «In order to protect the environment, the precautionary approach shall be widely applied by States according to their capabilities. Where there are threats of serious or irreversible damage, lack of full scientific certainty shall not be used as a reason for postponing cost-effective measures to prevent environmental degradation.» Rossella Bargiacchi

Climate Change Scenarios and the Precautionary Principle Precaution is “an action done to avoid possible danger”: we should pay attention to the worse outcomes Rank Dependent Utility (RDU) with convex transformation function systematically attaches more weight to worse outcomes => use RDU to implement the Precautionary Principle Rossella Bargiacchi

Climate Change Scenarios and the Precautionary Principle Results Proposition 1 For given π(B), and for convex weighting functions, an individual that maximizes RDU always chooses a level of consumption non-larger than an individual that maximizes EU Rossella Bargiacchi

Rossella Bargiacchi

Climate Change Scenarios and the Precautionary Principle For more general assumptions no general results can be derived. Rossella Bargiacchi

Climate Change Scenarios and the Precautionary Principle Numerical simulations with pseudo-randomly chosen parameters show that: RDU with convex weights leads to higher emissions than EU for 12% of generated parameters combinations RDU with inverse-S shaped weights leads to higher emissions than EU for 31% of generated parameters combinations Rossella Bargiacchi

Climate Change Scenarios and the Precautionary Principle Conclusions The precautionary principle implies sensitivity to physical parameters (here B and α), not just to economic assumptions Prudent behavior can lead to higher emission levels than EU would predict Inverse-S shaped decision makers are likely to choose too high emission levels: it is relevant to understand how actual policy makers behave in the face of uncertainty Rossella Bargiacchi