The Economics of Global Environmental Risks

This chapter focusses on global environmental risks such as climate change, an issue that must be confronted as we move into the future. It proposes sound principles of risk management that make sense in today's society generally, going beyond their role of averting and hedging climate risks. This chapter is about these and related questions. In attempting to answer them, it deals with different aspects of the theory of risk-bearing. I explain current responses to global change, focusing on the new challenges: human-induced or endogenous risks, including potentially catastrophic risks, which are not adequately treated by traditional economic analysis. In summary, we are dealing with risks that have two major new characteristics: they are endogenous and potentially catastrophic. In addition, climate risks have three more conventional features: they are poorly understood, correlated and irreversible. In all cases, this chapter proposes ways to advance our understanding of the problems. This chapter proposes ways to evaluate decisions under endogenous and potentially catastrophic risks, and incorporates often neglected features of correlated, poorly understood and irreversible risks. The analysis proposed here opens new ways of thinking and at the same time poses new challenges. At the end I indicate new areas of research.