Wrestling with Uncertainty in Climate Economic Models‡

This paper uses insights from decision theory under uncertainty to explore research challenges in climate economics. We embrace a broad perspective of uncertainty with three components: risk (probabilities assigned by a given model), ambiguity (level of confidence in alternative models), and misspecification (potential shortfalls in existing models). We survey recent climate science research that exposes the uncertainty in climate dynamics that is pertinent in economic analyses and relevant for using models to provide policy guidance. The uncertainty components and their implications for decision theory help us frame this evidence and expose the modeling and evidential challenges. ‡We thank Mike Barnett, Amy Boonstra, Diana Petrova and Bob Litterman for helpful comments on an earlier draft. ∗University of Wisconsin and University of Missouri, Columbia ∗∗University of Chicago