Uncertainty and Climate Change Intervention: An Introduction to the Economics of Climate Change

Abstract

The pressing reality of global climate change has resulted in a great deal of focus on proposals for market-based government intervention. Currently proposed intervention can take one of two forms: either it can achieve reductions in carbon emissions by controlling the quantity of allowable carbon emissions or it can do the same by setting the price of carbon emissions. If we approach the issue of climate change as a classic externality problem and assume perfect information, economic theory suggests that an optimal level of carbon abatement can be achieved by either method. But, with the issue of climate change we are dealing with a host of unknown costs and benefits of abatement, and we cannot be sure that either method will be efficient. Thus, the role of uncertainty must factor into any policy decision. In this paper, we apply theoretical concepts of informational uncertainty to the issue of climate change. We find that depending on the curvatures of the costs and benefit functions, one type of government intervention may be preferable to the other, with arguments made for each case. Our analysis will highlight the need for further research into the anthropogenic causes and effects of climate change, as well as the need for policymakers to consider the role uncertainty and the precautionary principle play when deciding what sort of government intervention policy to pursue.