Title: Uncertainty and Decision Making in Climate Change Economics
Speaker: Geoffrey Heal, Finance and Economics, Columbia Business School
Geoffrey Heal, Donald C. Waite III Professor of Social Enterprise at Columbia Business School, is noted for contributions to economic theory and resource and environmental economics. He holds bachelors (first class), masters and doctoral degrees from Cambridge University, where he studied at Churchill College and taught at Christ's College. He has also taught at Sussex, Essex, Yale, Stanford, Ecole Polytechnique, Stockholm and Princeton. He holds an Honorary Doctorate from the Universite´ de Paris Dauphine.
Author of eighteen books and about two hundred articles, Professor Heal is a Fellow of the Econometric Society, past Managing Editor of the Review of Economic Studies, Past President of the Association of Environmental and Resource Economists, recipient of its prize for publications of enduring quality and a Life Fellow, recipient of the 2013 Best Publication Prize of the European Association of Environmental and Resource Economists, a Director of the Union of Concerned Scientists and a founder and Director and chairman of the Board of the Coalition for Rainforest Nations, developers of the REDD policy for reducing deforestation by awarding carbon credits for forest conservation. Recent books include Nature and the Marketplace, Valuing the Future, When Principles Pay and Whole Earth Economics (forthcoming).
Professor Heal chaired a committee of the National Academy of Sciences on valuing ecosystem services, was a Commissioner of the Pew Oceans Commission, was a coordinating lead author of the IPCC's Fifth Assessment Report, was a member of President Sarkozy's Commission on the Measurement of Economic Performance and Social Progress, was a member of the advisory board for the World Bank's 2010 World Development Report and the United Nations Environment Program's 2011 Human Development Report, and acts as an advisor to the World Bank on its Green Growth project. He is also a Director of Public Business, a foundation that promotes in-depth public interest journalism and a member of the Advisory Board of Green Seal.
He has been a principal in two start-up companies, a consulting firm and a software and telecommunications company, and until recently was a member of the Investment Committee of a green private equity group. He teaches MBA courses on "Current Developments in Energy Markets," "Business and Society: Doing Well by Doing Good?" and "The Business of Sustainability," teaches a doctoral course on advanced microeconomic theory, and advises doctoral students interested in sustainability.
The issue of climate change is beset with uncertainties, many of which are only partially captured by our existing analytical tools. This “Reflections” explores these uncertainties, some of which are rooted in the underlying science while others stem from an imperfect understanding of how the socioeconomic system will evolve and cope with climatic shifts. Although robust general conclusions about the nature and impacts of climate change can be drawn fromthe existing scientific and economic literatures, inmany cases our knowledge of the climate problem is ambiguous and our uncertainty is deep. In the words of Knight (1921), we are in a world of “uncertainty” (unknown probabilities) rather than “risk” (known probabilities). How then should we make policy decisions in such an informational environment?
There have been several surveys of uncertainty in environmental economics, and climate change in particular. These include Heal and Kristrom (2002) and Pindyck (2007), as well as a 2011 symposium in this journal (Nordhaus 2011; Pindyck 2011; Weitzman 2011) that examined some of the questions raised by fat-tailed probabilities of climate catastrophes.1 These reviews focus on issues that have become the bread and butter of economic approaches to uncertainty: irreversibility, discounting, and the consequences of the standard expected utility approach to representing uncertainty.
This article takes a different approach, arguing that the expected utility framework for decision making under uncertainty may be of limited use for analyzing the climate problem (see also Kunreuther et al. 2013). We review the decision theory literature, explore alternative decision frameworks that may bemore appropriate, and investigate how they can be applied to the issue of climate policy. In particular, we ask, What do we know about the climate problem, can we meaningfully characterize our knowledge with objective probabilities derived fromdata, and what will, in all likelihood, remain unquantifiable?We argue that some of the most important uncertainties in climate economics fall into the last category: they are inherently unpredictable.
The remainder of the article is organized as follows. First we discuss sources of uncertainty and their relative importance for climate policy.We decompose the sources of uncertainty into scientific and socioeconomic components, with the former arising from our incomplete knowledge of the climate system and the latter from our imperfect understanding of the impacts of climate change on human societies, how those societies will respond, and how we should value these impacts. Next we examine decision frameworks that may be more appropriate in the context of deep uncertainty, discuss how they can be applied to the climate problem, and review some examples of such applications.We conclude with a brief summary and discussion of the challenges and opportunities for economists to develop approaches to uncertainty and decision making in climate economics.