Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/260458 
Authors: 
Year of Publication: 
2020
Series/Report no.: 
WiSo-HH Working Paper Series No. 55
Publisher: 
Universität Hamburg, Fakultät für Wirtschafts- und Sozialwissenschaften, WiSo-Forschungslabor, Hamburg
Abstract: 
Cost risk analysis (CRA) is currently emerging as a noticed decision-analytic framework within the field of climate economics. It combines the expected utility-based structure of cost benefit analysis (CBA) with the target-based approach of cost effectiveness analysis (CEA). As such, it offers a promising candidate for those decision-makers who would like to express their precautionary attitude in view of deeply uncertain global warming impacts through a temperature target, yet who would like to avoid the dynamic inconsistencies of CEA. Here we ask the question whether CRA is potentially subject to the 'dismal theorem' after Weitzman (2009b) like CBA is. We find that in fact, structurally similar issues may arise which, however, can be ameliorated through options specific to CRA. As CRA is not a well-established concept yet, for the convenience of the reader we start by reviewing both its rationale and key results derived from it. This will provide the conceptual basis of justification for CRA-specific solutions of dismal theorem-type effects. The two alternative solutions we offer are as follows. (i) Capping marginal risk at some maximum temperature value beyond which a decision maker caring about the precautionary principle might not show any interest; (ii) sticking to the most conservative risk function of kink-linear type, still in-line with the axiomatic of CRA, thereby avoiding singularities in expected marginal risk.
Subjects: 
dismal theorem
climate targets
fat tails
cost risk analysis
decision under uncertainty
mitigation
precautionary principle
Document Type: 
Working Paper

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