The end of cost-benefit analysis

As noted in the introduction, certain aspects of deep uncertainty—particularly fat-tailed distributions and climate tipping points—result in non-negligible probability of global catastrophe. Both Weitzman (fat tails) and Lenton et al. (tipping points) conclude that the kind of cost-benefit analysis (CBA) that many decision makers rely on (for climate adaptation planning, but also a wide variety of other applications) is rendered obsolete by the kind of deep uncertainties related to fat tails and tipping points.

Weitzman, perhaps, states this most clearly in his Dismal Theorem (2009). Here, he argues that the disutility of extreme climate (i.e., the liability associated with damaged) is essentially unbounded (unlimited). In other words, at the extreme of the fat tail are infinite losses (for human purposes) with non-zero probabilities. This suggests a willingness to pay to avoid extreme damages should reasonably be very, VERY large.

The result?… Either a cost-benefit analysis (CBA) will endorse arbitrarily costly (unfeasible) projects, or it must truncate (or ignore) areas in the tail of the probability distribution that represent such global catastrophes. In the former case, results are meaningless because we’re unlikely to trade infinite wealth to eliminate an unlikely, but possibly infinite loss. In the latter case, our CBAs under-represents the full risk to which we’re exposed and, as such, may result in insufficient endorsement for adaptation measures.

Both Weitzman and Lenton et al. seem to imply that financial analysis through cost-benefit analysis is an inappropriate approach—that we need some other decision criteria to determine what, and how much, adaptation action is appropriate to our circumstances. Though neither explicitly mention the precautionary principle, others have proposed it as a more appropriate decision criteria in situations of deep uncertainty and non-negligible probability of global catastrophe.

Many of you are, no doubt, very familiar with the precautionary principle. Though it has been articulated in many different ways, the Wingspread Consensus Statement is, perhaps, the most clear statement of the principle as it might apply to climate change.

Wingspread Consensus Statement on the Precautionary Principle (2013, August 5)

“We believe existing environmental regulations and other decisions, particularly those based on risk assessment, have failed to protect adequately human health and the environment – the larger system of which humans are but a part.

“We believe there is compelling evidence that damage to humans and the worldwide environment is of such magnitude and seriousness that new principles for conducting human activities are necessary.

“While we realize that human activities may involve hazards, people must proceed more carefully than has been the case in recent history. Corporations, government entities, organizations, communities, scientists and other individuals must adopt a precautionary approach to all human endeavors.

“Therefore, it is necessary to implement the Precautionary Principle: When an activity raises threats of harm to human health or the environment, precautionary measures should be taken even if some cause and effect relationships are not fully established scientifically.”