The Economics of Inaction on Climate Change: A Sensitivity Analysis

By Frank Ackerman and Ian J. Finlayson.
October 2006

Why do economic models of climate change so often find that the “optimal” policy is to do very little about this serious global threat? Frank Ackerman and Ian Finlayson examine the widely used DICE model, focusing on its choice of a discount rate, its somewhat dated science [in the 1999 version, the latest available when the article was written], and its curious assumption of global net benefits from moderate warming. Alternatives to these three assumptions cause significant changes in the model’s optimal policy, resulting in a high and rising carbon tax which would stimulate immediate, large-scale mitigation. In view of the ambiguities of such cost-benefit calculations, it would be preferable to pursue a cost-effectiveness analysis of the least-cost strategies for achieving safe levels of atmospheric CO2.