Research Paper: Uncertainty in "Environmental Economics"

Whenever we consider the economics of climate change the whole debate revolves around "uncertainty". The IPCC, Stern etc. all base their conclusions dependent on probabilities.

The issue is complex and there are no easy answers. This paper makes this important point clearly and concisely.

This is a timely NBER paper by Robert Pindyck at MIT.

"Uncertainty in Environmental Economics"
NBER Working Paper No. W12752


Contact: ROBERT S. PINDYCK
Massachusetts Institute of Technology (MIT) - Sloan
School of Management, National Bureau of Economic
Research (NBER)
Email: rpindyck@mit.edu
Auth-Page: http://ssrn.com/author=25841

Full Text: http://ssrn.com/abstract=949761

ABSTRACT: In a world of certainty, the design of environmental policy is relatively straightforward, and boils down to maximizing the present value of the flow of social benefits minus costs. But the real world is one of considerable uncertainty - over the physical and ecological impact of pollution, over the economic costs and benefits of reducing it, and over the discount rates that should be used to compute present values. The implications of uncertainty are complicated by the fact that most environmental policy problems involve highly nonlinear damage functions, important irreversibilities, and long time horizons.
Correctly incorporating uncertainty in policy design is therefore one of the more interesting and important research areas in environmental economics. This paper offers no easy formulas or solutions for treating uncertainty - to my knowledge, none exist.
Instead, I try to clarify the ways in which various kinds of uncertainties will affect optimal policy design, and summarize what we know and don`t know about the problem.

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