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Catastrophic Events and Stochastic Cost-benefit Analysis of Climate Change

Catastrophic Events and Stochastic Cost-benefit Analysis of Climate Change An Editorial Comment 1. Introduction The role of cost-benefit analysis (CBA) in making decisions about climate change has been a contentious issue for long. The debate was sparked by the publication of Nordhaus’s DICE model (Nordhaus, 1994). His approach boils down to the view that emissions should be reduced as long as the marginal benefit of doing so (i.e., avoided emissions) is higher than the marginal cost. In doing so, he found that only modest abatement levels were warranted (from an economic point of view), e.g., a 14% reduction by the year 2100 below baseline emissions. But since baseline emissions grow, his optimal CO2 emission trajectory amounts to an increase of the emissions by a factor of three above current levels. Several other studies using similar approaches end up with similar results, e.g., Manne et al. (1995) and Peck and Teisberg (1993). These results have been challenged by a growing number of studies. Cline (1992), Azar and Sterner (1996), Rougharden and Schneider (1999) and others have estimated the marginal cost of CO2 emissions or the optimal level of emission reduction to be much higher than Nordhaus. Others, e.g., Schneider (1993, 1997), Grubb (1993), Azar (1998), Azar (2000), Schneider http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Climatic Change Springer Journals
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