Coping with Uncertainty: Cost-Benefit Analysis, the Precautionary Principle, and Climate Change

Abstract

Two competing strategies for setting climate policy are cost-benefit analysis and the precautionary principle. This Article analyzes these strategies and considers their application to climate risks in four case studies: determination of the social cost of carbon, international endorsement of a 2° ceiling on warming, EPA’s endangerment finding, and the polar bear listing decision. In practice, cost-benefit analysis of climate change encounters great difficulties. The precautionary principle works well in determining whether to regulate, but gives modest guidance about the level of regulation. One possibility might be to combine the approaches in a two-step process: (1) using economic models to help identify feasible emissions trajectories that minimize the risk of catastrophic outcomes, and then (2) backing out the social cost of carbon based on compliance costs along the optimum trajectories. In the meantime, the four case studies indicate that decision makers have managed to make reasonably defensible decisions despite the obstacles.