What are robust strategies in the face of uncertain climate threshold responses?

We use an integrated assessment model of climate change to analyze how the implementation of different decision-making criteria affects preferred investments into climate control, the distribution of outcomes, the robustness of the strategies, and the economic value of information. Specifically, we modify the Dynamic Integrated model of Climate and the Economy (DICE-07) to include a simple representation of a climate threshold response, parametric uncertainty, structural uncertainty, and learning. Economic analyses of climate change strategies typically adopt the expected utility maximization (EUM) framework. We compare EUM with two decision criteria adopted from the finance literature, namely Limited Degree of Confidence (LDC) and Safety First (SF). Both criteria increase the relative weight of the performance under the worst-case scenarios compared to EUM. The tradeoff between maximizing expected utility and minimizing the worst case outcomes is shown to be equivalent for the LDC David McInerney Department of the Geophysical Sciences 5734 S. Ellis Ave. HGS 571 Chicago, IL 60637 USA Fax: (773) 702-9505 E-mail: [email protected] Robert Lempert Frederick S.Pardee Center for Longer Range Global Policy and the Future Human Condition RAND 1776 Main St. Santa Monica, CA 90401 USA Phone: (310) 393-0411 x6217 E-mail: [email protected] Klaus Keller 436 Deike Building Department of Geosciences Penn State University Park, PA, 16802 USA Phone: (814) 865-6718 Email: [email protected]