Addressing Uncertainty

The Timing of Climate Change Policy

Addressing Uncertainty

Despite significant gains in scientists’ understanding of climate change, significant uncertainties remain. For example, climate models cannot simulate the vast complexity of the climate system with perfection, and are based on uncertain assumptions regarding future GHG emissions. Furthermore, while climate models can make reliable projections about change in the average global climate, their projections about change in regional climate are less reliable.

Substantial uncertainty exists regarding the economic aspects of climate change as well. Some of the differences among the results of various economic models reflect differences in the structure and assumptions of those models.⁶ Furthermore, the cost of limiting carbon emissions will depend on hard-to-predict factors such as how quickly technology responds or how effectively firms pursue low-cost carbon reductions around the world (perhaps through a process known as emissions trading).⁷ 

Uncertainty is sometimes cited as a reason to delay action on climate change: Why take immediate steps to reduce emissions if climate change might have only minor consequences for human societies? Economists speak of “irreversibility” — the risk that we might bear a cost that cannot be reversed. For example, society could require firms to reduce GHG emissions and subsequently learn that climate damages were less severe than imagined. Some of society’s resources will have been irreversibly “sunk” into unwarranted abatement activities. Many economic models focus only on this type of irreversibility when analyzing climate change policy. Because virtually all GHGs have longer decay rates than physical capital, atmospheric GHG loadings are effectively irreversible as well. Ignoring this second irreversibility may lead us to defer action on climate change when such action is warranted.⁸ 

Thus, uncertainty is as much a reason to act as it is to delay — if not more so. This is particularly true in light of the economy’s ongoing investment in new plants and equipment, which are usually very long-lived. Delaying action on climate raises the risk that these new investments will have to be retired or modified later at great cost once climate policies are enacted, which is another type of irreversible risk.

Given what we do know about climate change, uncertainty speaks to the need to take steps now. Delaying action may stop us from taking potentially unwarranted action, but it could preclude necessary and cost-effective actions, thus exacerbating the climate challenge and leading firms to make investments that will be obsolete under a future climate policy regime.

NEXT: Sequential Decisionmaking

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