Cost efficient energy scenarios to meet climate targets: does a hedging approach change economic policy recommendations?

The last assessment report by the IPCC (AR5, WGIII, 2014) shows that the 2° target is compatible with continued economic growth and that the globally averaged short-term loss of consumption to finance an energy transition is 1%. Furthermore, initial work on the 1.5°C target shows that the economic expenditures are significantly higher, but are likely to be of the same order of magnitude.

This complex of results on the costs of an energy transition was generated with the help of integrated energy and climate economic models, as a result of which hundreds of energy scenarios were evaluated. Most of these scenarios were generated without an explicit representation of uncertainty about essential input parameters such as the learning rates of individual energy technologies or climate sensitivity.

This article examines the mechanisms through which explicit consideration of uncertainty has changed or could change policy recommendations. In particular, it is pointed out that the economic paradigm implicitly used in the above, asking for cost-minimal solutions under climate targets, needs to be generalized if one does not want to turn a blind eye to the possibility of future learning about uncertain parameters in today's investment planning.

In this context, a separate approach (Held, 2019) is presented and discussed for which class of issues the energy scenarios summarized in the most recent IPCC report are robust under uncertainty and for which qualitatively different policy recommendations would result.

Reference

Held, Cost Risk Analysis – Dynamically Consistent Decision-Making under Climate Targets, Environmental and Resource Economics, 72 (1), 247-261, DOI 10.1007/s10640-018-0288-y, http://link.springer.com/article/10.1007/s10640-018-0288-y (2019).