Elizabeth Baldwin (LSE Grantham Institute): Climate Policy with Incomplete Knowledge

Thursday, 19 March, 2:00

Elizabeth Baldwin (LSE Grantham Institute)

Climate Policy with Incomplete Knowledge

ABSTRACT.  The economic effects of climate change, and the costs of any policy response, are very uncertain.  Models ought to reflect this.  The `minimal’ theory for decision-making under Knightian uncertainty is is a model of incomplete beliefs and tastes.  I define a `dismal’ situation in which different assumptions, all plausible, give rise to large estimated costs which differ dramatically.  I claim this is the correct way to think about climate change.  I then discuss the implications for climate policy, in particular re-assessing the question of `prices versus quantities’ Weitzman (1974) in the context of incomplete preferences.  This analysis provides new `wrong target’ effects, which supplement the original result.  The `dismal theorem’ of Weitzman (2009) provides an example of my `dismal’ situation, but as my broader framing shows, it may have led to too narrow a focus on `very unlikely, very catastrophic’ events.