new working paper: “An Aggregation Dilemma”

I am currently working on a project on aggregation issues in integrated assessment models. I noticed that there is what I call an Aggregation Dilemma in these models which can have sizable impacts on climate policy. You can find a preliminary version of the paper HERE.

I would be very happy for comments and discussions. Please also disseminate this paper to interested co-authors.

At the moment I am extending this work to country-level data, so watch out for more news soon.

Abstract:

The results in this paper show that the level of aggregation used in a social welfare function matters significantly for policy analysis. Using climate change as an example, it is shown that, under the mild and widely-accepted assumptions of asymmetric climate change impacts and declining marginal utility, an aggregation dilemma may arise that dwarfs most other policy-relevant aspects in the  climate change cost-benefit analysis. Estimates based on the RICE-99 model (Nordhaus and Boyer, 2000) suggest that aggregation leads to around 26% higher total world emissions than those from a regional model. The backstop energy use would be zero in the model which aggregates consumption in utility, while it would be 1.3% of Gross World Product in a regionally-disaggregated version. In general we observe that richer countries will be required to undertake stronger efforts toward climate policy based on the aggregated utility social welfare function and compared to both the aggregated utility function with Negishi weights and the aggregated consumption function. We propose criteria that may aid in deciding on the level of aggregation one might wish to choose depending on both positive and normative criteria. Though the policy recommendations from fully aggregated models like the DICE model are always used as a benchmark for policy making, the results here suggest that this should be done with the reservations raised by the Aggregation Dilemma in mind.

Thank you for your interest!

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