The integrated assessment models (IAMs) that economists use to analyze the expected costs and benefits of climate policies frequently suggest that the “optimal” policy is to go slowly and to do relatively little in the near term to reduce emissions. We trace this finding to the hidden assumptions and limitations of IAMs. For example, they typically discount future impacts from climate change at relatively high rates. This practice may be appropriate for risky, short-term financial decisions but its extension to intergenerational environmental issues rests on several untestable and philosophically controversial hypotheses. IAMs also assign arbitrary monetary values to the benefits of climate mitigation on the basis of simplistic assumptions about the monetary worth of human lives and ecosystems, while downplaying scientific uncertainty about the extent of expected damages. In addition, IAMs generally exaggerate mitigation costs, by failing to reflect the socially determined, path-dependent nature of technical change and ignoring the potential savings from reduced energy consumption and other opportunities for innovation.

A better approach to climate policy, drawing on recent research on the economics of uncertainty, would reframe the problem as buying insurance against catastrophic, low-probability events. Policy decisions should be made on scientific grounds that set the maximum tolerable increase in temperature and/or carbon dioxide levels. The appropriate role for economists is to then determine the least-cost global strategy to achieve that target. While this is still a very complex problem, it is far more tractable, relevant, and defensible than the cost-benefit comparisons attempted by most IAMs.