Uncertainty and climate change: The IPCC approach vs decision theory

Abstract

Uncertainty is one of the most important challenges in the study of climate change and its interactions with the economy. This paper looks at this uncertainty from two different points of view. The first one is the way in which the IPCC deals with uncertainty in its reports, and the way in which that uncertainty is communicated. The IPCC approach is implemented using a combination of quantitative and qualitative methods as well as heuristics. The IPCC studies climate change, its evolution, and its impact in a context which, in terms of the decision-making approach, is akin to analysis under risk. The second point of view is the one adopted by decision theory, which deals with uncertainty in the Knightian sense and, more specifically, with uncertainty that is manifested in multiple probabilistic models or priors. The presence of multiple priors is associated with ambiguity aversion and misspecification concerns that necessitate the use of maxmin optimizing approaches. The IPCC and the decision theory approaches are briefly reviewed and compared, with the objective of finding ways to accommodate the concept of risky parameters or impacts of the IPCC framework within the framework of optimization under uncertainty in multiple probabilistic models.