infonet-economy

Risk aversion plays a central role in the decisions made in the face of uncertainties, and climate-change mitigation should be no exception. However, the interlinkage of risk aversion and climate-change uncertainties has hardly been investigated numerically, in part because of the computational difficulties of stochastic optimization. In this paper, we apply the numerical techniques of stochastic optimization to the economic modeling of climate change, with the aim of modeling the decision preferences of a risk-conscious agent in the face of unpredictable climate change. The model underlines the critical role played by the risk-aversion parameter in determining the effects of uncertainties on mitigation, not only in level but also in sign.