Uncertainty, Learning and Ambiguity in Economic Models on Climate Policy: Some Classical Results and New Directions

We present how uncertainty and learning are classically studied in economic models. Specifically, we study a standard expected utility model with two sequential decisions, and consider two particular cases of this model to illustrate how uncertainty and learning may affect climate policy. While uncertainty has generally a negative effect on welfare, learning has always a positive, and thus opposite, effect. The effects of both uncertainty and learning on decisions are less clear. Neither uncertainty nor learning can be used as a general argument to increase or reduce emissions today without studying the specific intertemporal costs and benefits explicitly. Considering limits in applying the expected utility framework to climate change problems, we then consider a more recent framework with ambiguity-aversion which accounts for situations of imprecise or multiple probability distributions. We discuss both the impact of ambiguity-aversion on decisions and difficulties in applying such a non-expected utility framework to a dynamic context.