Project 4b – Climate change, non-linear systems and economic decisions

Lead staff member: Simon Dietz

Other project team members: Louise Kessler and David Stainforth

The climate is a complex system that features important non-linearities, and under climate change the climate system is being driven into previously unobserved states. The aim of this project is to study the implications of uncertainty about future climate change, including uncertainty associated with non-linearities in the system, for the economy. There has recently been a surge of interest in the implications of uncertainty about the climate system for economic analysis, yet the existing body of academic research remains limited in several ways. First, the implications of uncertainty for the all-important topic of discounting have been incompletely worked out. In particular, we need to know whether reducing carbon emissions increases or decreases the aggregate consumption risk faced by future generations, because standard discounting theory tells us that projects (i.e. reducing carbon emissions in this setting) which increase consumption risk in the future should be discounted at a risk premium. Second, what are the implications for financial assets and financial stability, given that there should be a connection between economic growth and financial assets? Third, current economic models of climate change exclude important feedback processes that could be material to the social cost of carbon emissions, including the permafrost carbon feedback. Fourth, what is the impact of compound extreme weather events on the economy?


For this project we are using mixed economic methods, including integrated assessment modelling, which also brings in elements of atmospheric physics and climate science, applied microeconomic theory and econometric analysis.

Major completed outputs to date