UNCERTAINTY, SHORT-TERM HEDGING AND THE TOLERABLE WINDOW APPROACH

Hedging strategies that minimize the expected discounted cost of restr icting both temperature change and the rate of temperature change with in 'tolerable windows' defined by German researchers are explored, Tar geting the smaller window set by the German Advisory Board on Climate Change through the year 2020 emerges as the least-cost strategy as lon g as the likelihood that this smaller target will ultimately be chosen is greater than roughly 11%, At this break-even likelihood, though, t he expected cost, even discounting according to the Ramsey optimal gro wth rule, amounts to something on the order of $21 trillion (1990$), S ince it is the rate of change constraint that binds more Immediately, this estimate can be interpreted as the opportunity cost of limiting t emperature change to no more than 0.2 degrees C through the year 2020. (C) 1997 Elsevier Science Ltd. All rights reserved.