Climate change is an example of an externality which justifies a role for policy intervention in market economies. There are, however, limits to our understanding of the impacts of this phenomenon. Geophysicists examine the repercussions for the earth’s climate induced by alternative emission scenarios and model specifications. Using simplified approximations, they produce tractable characterizations of the associated cross-model uncertainties. Meanwhile, economists postulate highly stylized damage functions to speculate about how climate change might alter macroeconomic and growth opportunities. I will explore how to use contributions from decision theory and tools from asset pricing to incorporate broad notions of uncertainty into the assessment of alternative economic policies.
i) Pricing Uncertainty Induced by Climate Change, Michael Barnett, William Brock, Lars Peter Hansen, The Review of Financial Studies, Volume 33, Issue 3, March 2020, Pages 1024–1066, https://doi.org/10.1093/rfs/hhz144
ii) Climate Change Uncertainty Spillover in the Macroeconomy, Michael Barnett, William Brock, Lars Peter Hansen, NBER Macroeconomics Annual, volume 36, 2022. © 2022 National Bureau of Economic Research. All rights reserved. Published by The University of Chicago Press for the National Bureau of Economic Research. https://doi.org/10.1086/718668. Link: http://larspeterhansen.org/wp-content/uploads/2022/05/718668.pdf