Climate policy: How to deal with ambiguity?
Abstract
We study the impact of ambiguity and ambiguity attitudes on optimal adaptation and mitigation decisions when the future environmental quality is ambiguous and the decision maker’s (DM) preferences are represented by the α-Maxmin Expected Utility model. We show that ambiguity aversion plays a significant role in designing an optimal climate policy that is different from risk aversion. We also focus on the induced effects of changes in ambiguity, captured by the arrival of additional information. We state that a change in the informational structure may trigger more efforts of both mitigation and adaptation depending on both the DM’s attitude toward ambiguity and her environmental preferences.