IPCC Fourth Assessment Report: Climate Change 2007
Climate Change 2007: Working Group III: Mitigation of Climate Change

3.6.1 Insights into the choice of a short-term hedging strategy in the context of long-term uncertainty

There are two main ways of framing the decision-making approaches for addressing the climate change mitigation and adaptation strategies. They depend on different metrics used to assess the benefits of climate policies:

a. A cost-effectiveness analysis that minimizes the discounted costs of meeting various climate constraints (concentration ceiling, temperature targets, rate of global warming).

b. A cost-benefit analysis that employs monetary estimates of the damages caused by climate change and finds the optimal emissions pathway by minimizing the discounted present value of adaptation and mitigation costs, co-benefits and residual damages.

The choice between indicators of the mitigation benefits reflects a judgment on the quality of the available information and its ability to serve as a common basis in the decision-making process. Actually the necessary time to obtain comprehensive, non-controversial estimates of climate policy benefits imposes a trade-off between the measurement accuracy of indicators describing the benefits of climate policies (which diminishes as one moves down the causal chain from global warming to impacts and as one downscales simulation results) and their relevance, that is their capacity to translate information that policymakers may desire, ideally prior to a fully-informed decision. Using a set of environmental constraints is simply a way of considering that, beyond such constraints, the threat of climate change might become unacceptable; in a monetary-metric, or valuation approach, the same expectation can be translated through using damage curves with dangerous thresholds. The only serious source of divergence between the two approaches is the discount rate. Within a cost-effectiveness framework, environmental constraints are not influenced by discounting. Conversely, in a cost-benefit framework, some benefits occur later than costs and thus have a lower weighting when discounted.