Equity, efficiency, uncertainty, and the mitigation of global climate change

Policies to mitigate potential damages from global climate change impose co sts on the current generation to provide benefits to future generations. Th is article examines how comparisons among three stylized policies-business- as-usual, mitigation of climate change, and compensation for climate damage s-depend on social preferences with respect to risk and intertemporal equit y. Also examined is the opportunity-cost criterion, which asserts that miti gation should not be chosen if its net present value is smaller than that o f business-as-usual. Analysis reveals that the discount factor used to eval uate whether mitigation satisfies this criterion depends on preferences reg arding risk and intertemporal inequality of consumption, and on the risk of the compensation policy. Risk aversion favors mitigation over business-as- usual. If society is neutral to inequality, risk aversion disfavors compens ation, but if society is inequality averse, the effect of risk aversion on preferences between compensation and business-as-usual is ambiguous. Inequa lity aversion tends to favor business-as-usual over both alternative polici es provided that, roughly speaking, the anticipated future improvements in welfare exceed the anticipated climate damages.