On modeling and interpreting the economics of catastrophic climate change

Abstract

Some uncertainties about climate change, like the probability of disastrous temperature changes, are structural uncertainties derived from imprecisely known parameters or probability distributions. The distribution of outcomes for such cases is fat-tailed and conventional benefit-cost analysis (CBA) methodology is less useful, as any CBA of a situation with potentially unlimited downside exposure when no plausible bound can be confidently imposed by prior knowledge is rendered exceedingly tricky by the poor convergence of the expected value to a finite number as knowledge improves. Any interpretation or application of the dismal theorem is rendered exceedingly tricky by the bedeviling (for CBA) nonuniform convergence of the expected value or expected utility in its other parameters relative to the key VSL-like parameter. – AI-generated abstract.