Setting environmental policy when experts disagree

Athanassoglou, Stergios and Bosetti, Valentina (2012): Setting environmental policy when experts disagree. Forthcoming in: Environmental and Resource Economics

Abstract

How can a decision-maker assess the potential of environmental policies when a group of experts provides divergent estimates on their effectiveness? To address this question, we propose and analyze a variant of the well-studied $\alpha$-maxmin model in decision theory. In our framework, and consistent to the paper's empirical focus on renewable-energy R\&D investment, experts' subjective probability distributions are allowed to be action-dependent. In addition, the decision maker constrains the sets of priors to be considered via a parsimonious measure of their distance to a benchmark ``average'' distribution that grants equal weight to all experts. While our model is formally rooted in the decision-theoretic framework of Olszewski~\cite{o07}, it may also be viewed as a structured form of sensitivity analysis. We apply our framework to original data from a recent expert elicitation survey on solar energy. The analysis suggests that more aggressive investment in solar energy R\&D is likely to yield significant dividends even, or rather especially, after taking expert ambiguity into account.

• Item Type: MPRA Paper
• Language: English
• Keywords: expert elicitation; expert aggregation; decision theory; renewable energy R\&D
• Subjects: C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C60 - General; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q4 - Energy > Q42 - Alternative Energy Sources; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q4 - Energy > Q48 - Government Policy

References

\bibitem{a08} D. Ahn (2008), ``Ambiguity without a State Space,'' {\em Review of Economic Studies}, 75, 3--28.

\bibitem{ah72} K. Arrow and L. Hurwicz (1972), ``An Optimality Criterion for Decision-Making under Ignorance,'' in C.F. Carter and L.J. Ford (eds.) {\em Uncertainty and Expectations in Economics: Essays in Honour of G.L.S. Shackle} (Oxford: Basil Blackwell), 1-11.

\bibitem{a10} T. Asano (2010). Precautionary principle and the optimal timing of environmental policy under ambiguity. {\em Environmental and Resource Economics}, 47, 173-196.

\bibitem{ax12} S. Athanassoglou, and A. Xepapadeas (2012), ``Pollution control with uncertain stock dynamics: When, and how, to be precautious,'' {\em Journal of Environmental Economics and Management}, 63, 304-320.

\bibitem{bcw12} A. Baillon, L. Cabantous, and P. Wakker (2012), ``Aggregating imprecise or conflicting Beliefs: An experimental investigation using modern ambiguity theories,'' {\em Journal of Risk and Uncertainty}, 44(2), p.115-147

\bibitem{bck09a} E. Baker, H. Chon, J. Keisler (2009), ``Advanced solar R\&D: Combining economic analysis with expert elicitations to inform climate policy,'' {\em Energy Economics}, 31, S37-S49. % \bibitem{bck09b} E. Baker, H. Chon, J. Keisler (2009), ``Carbon capture and storage: combining economic analysis with expert elicitations to inform climate policy,'' {\em Climatic Change}, 96, 379-408. % \bibitem{bk11} E. Baker and J. Keisler (2011), ``Cellulosic biofuels: Expert views on prospects for advancement,'' {\em Energy}, 36, 595-605.

\bibitem{b06} V. Bosetti, C. Carraro, M. Galeotti, E. Massetti and M. Tavoni (2006), ``WITCH: A World Induced Technical Change Hybrid Model,'' \emph{Energy Journal}, 2, 13-38.

\bibitem{b12} V. Bosetti, M. Catenacci, G. Fiorese, and E. Verdolini (2012). ``The future prospect of PV and CSP solar technologies: An expert elicitation survey,'' {\em Energy Policy,} 49, 308-319.

\bibitem{cw99} R. Clemen and R. Winkler (1999), ``Combining Probability Distributions from Experts in Risk Analysis,'' {\em Risk Analysis}, 19, 187--203.

\bibitem{cw07} R. Clemen and R. Winkler (2007), ``Aggregating probability distributions,'' In: W. Edwards, R. Miles, \& D. von Winterfeldt (Eds.) Advances in Decision Analysis .(pp. 154-176). Cambridge , UK : Cambridge University Press.

\bibitem{c91} R. Cooke (1991), {\em Experts in Uncertainty: Opinion and Subjective Probability in Science,} Oxford University Press, USA.

\bibitem{cmk08} A.E. Curtright, G. Morgan, D.W. Keith (2008), ``Expert Assessments of Future Photovoltaic Technologies,'' {\em Environmental Science and Technology}, 42, 9031-9038.

\bibitem{e11} J. Eichberger, S. Grant, D. Kelsey, and G. Koshevoye (2011), ``The $\alpha$-MEU model: A comment,'' {\em Journal of Economic Theory}, 146, 1684--1698.

\bibitem{f13} G. Fiorese, M. Catenacci, E. Verdolini, and V. Bosetti (2013), ``Advanced biofuels: Future perspectives from an expert elicitation survey,'' {\em Energy Policy}, 56, 293--311.

\bibitem{gaj08} Gajdos, T., Hayashi, T., Tallon, J. M., and Vergnaud, J. C. (2008),``Attitude toward imprecise information'' {\em Journal of Economic Theory}, 140, 27-65.

\bibitem{gv13} Gajdos, T, and J. C. Vergnaud (2013). "Decisions with conflicting and imprecise information." {\em Social Choice and Welfare} 41, 427-452.

\bibitem{g01} P. Ghirardato (2001), ``Coping with Ignorance: Unforeseen Contingencies and Non-Additive Uncertainty,'' {\em Economic Theory}, 17, 247--276.

\bibitem{gmm04} P. Ghirardato, F. Maccheroni, and M. Marinacci (2004), ``Differentiating Ambiguity and Ambiguity Attitude,'' \emph{Journal of Economic Theory}, 118, 133-173.

\bibitem{gm11} I. Gilboa, and M. Marinacci (2012), ``Ambiguity and the Bayesian Paradigm,'' Advances in Economics and Econometrics: Theory and Applications, Tenth World Congress of the Econometric Society.

\bibitem{gs89} I. Gilboa and D. Schmeidler (1989), ``Maxmin Expected Utility with Non-Unique Prior,'' \emph{Journal of Mathematical Economics}, 18, 141--153.

\bibitem{j89} J.-Y. Jaffray (1989), ``Linear Utility Theory for Belief Functions,'' {\em Operations Research Letters}, 8, 107--112.

\bibitem{kmm05} P. Klibanoff, M. Marinacci, and S. Mukerji (2005), ``A Smooth Model of Decision Making Under Ambiguity,'' \emph{ Econometrica}, 73, 1849--1892.

\bibitem{k10} R. Knutti, R. Furrer, C. Tebaldi, J. Cermak, and G. A. Meehl (2010). "Challenges in combining projections from multiple climate models." {\em Journal of Climate} 23, 2739-2758.

\bibitem{k09} Kriegler, E., Hall, J. W., Held, H., Dawson, R., Schellnhuber, H. J. (2009). Imprecise probability assessment of tipping points in the climate system. Proceedings of the National Academy of Sciences, 106(13), 5041-5046.

\bibitem{lhw93} D. Ludwig, R. Hilborn, and C. Walters (1993). ``Uncertainty, resource exploitation, and conservation: lessons from history.'' {\em Science}, 260, 17-18.

\bibitem{m09} Meinshausen, Malte, Nicolai Meinshausen, William Hare, Sarah CB Raper, Katja Frieler, Reto Knutti, David J. Frame, and Myles R. Allen. "Greenhouse-gas emission targets for limiting global warming to 2 C." Nature 458, no. 7242 (2009): 1158-1162.

\bibitem{mc13} Millner, A., Calel, R., Stainforth, D. A., MacKerron, G. (2013). Do probabilistic expert elicitations capture scientistsÕ uncertainty about climate change?. Climatic change, 116(2), 427-436.

\bibitem{m13} A. Millner, S. Dietz, and G. Heal (2013). Scientific ambiguity and climate policy. {\em Environmental and Resource Economics},55, 21--46.

\bibitem{mh90} M.G. Morgan, and M. Henrion (1990), {\em Uncertainty: A guide to dealing with uncertainty in quantitative risk and policy analysis,} Cambridge University Press, New York.

\bibitem{mps01} M.G. Morgan, I. Pitelka, and E. Shevliakova (2001), ``Elicitation of Expert Judgments of Climate Change Impacts on Forest Ecosystems,'' {\em Climatic Change} 49, 279-307.

\bibitem{mak06} M. G. Morgan, P. J. Adams, and D.W. Keith (2006), ``Elicitation of Expert Judgments of Aerosol Forcing,'' {\em Climatic Change}, 75, 195-214

\bibitem{n94} W. Nordhaus (1994), ``Expert Opinion on Climatic Change,'' {\em American Scientist} 82, 45-51.

\bibitem{n08} W. Nordhaus. {\em A question of balance: Weighing the options on global warming policies}. Yale University Press, 2008.

\bibitem{o06} A. O'Hagan, C.E. Buck, A. Daneshkhan, J.R. Eiser, P.H. Garthwaite, D.J. Jenkinson, J.E. Oakey, and T. Rakow, (2006), {\em Uncertain judgments: Eliciting experts� probabilities,} John Wiley and Sons, Ltd., Chichester.

\bibitem{o07} W. Olszewski (2007), ``Preferences Over Sets of Lotteries,'' {\em Review of Economic Studies}, 74, 567-595.

\bibitem{p04} D. Popp (2004), ``ENTICE: Endogenous Technological Change in the DICE Model of Global Warming," {\em Journal of Environmental Economics and Management}, 48, 742--768.

\bibitem{r10} M. Rostek (2010), ``Quantile Maximization in Decision Theory,'' {\em Review of Economic Studies}, 77, 339--371.

\bibitem{s54} L. J. Savage (1954), \emph{The Foundations of Statistics}, Wiley, New York.

\bibitem{t10} N. Treich (2010). The value of a statistical life under ambiguity aversion. {\em Journal of Environmental Economics and Management}, 59, 15-26.

\bibitem{tk74} A. Tversky and D. Kahneman (1974), ``Judgment under Uncertainty: Heuristics and biases,'' {\em Science}, 185, 1124--1131.

\bibitem{tk83} A. Tversky and D. Kahneman (1983), ``Extensional vs. Intuitive Reasoning: The Conjunction Fallacy in Probability Judgment,'' {\em Psychological Review} 90, 293--315.

\bibitem{epa} U.S. EPA (2011), Expert Elicitation Task Force White Paper. available at http://www.epa.gov/stpc/pdfs/ee-white-paper-final.pdf

\bibitem{vx10} G. Vardas and A. Xepapadeas (2010), ``Model Uncertainty, Ambiguity and the Precautionary Principle: Implications for Biodiversity Management,'' {\em Environmental and Resource Economics}, 45, 379--404.

\bibitem{vs02} D. Vaughan and J. Spouge (2002), ``Risk Estimation of Collapse of the West Antarctic Ice Sheet,'' {\em Climatic Change} 52, 65--91.

% \bibitem{wb97} R.T. Woodward and R.C. Bishop (1997), ``How to Decide When Experts Disagree: Uncertainty-Based Choice Rules in Environmental Policy,'' {\em Land Economics}, 73, 492-507.

\bibitem{y69} Yaari, M. E. (1969). Some remarks on measures of risk aversion and on their uses. Journal of Economic theory, 1(3), 315-329.

\bibitem{z07} K. Zickfeld, A. Levermann, M.G. Morgan, T. Kuhlbrodt, S. Rahmstorf, and D.W. Keith, (2007), ``Expert judgements on the response of the Atlantic meridional overturning circulation to climate change,'' {\em Climatic Change}, 82, 235-265.

\bibitem{z10} K. Zickfeld, M.G. Morgan, D. Frame, D. Keith (2010), ``Expert Judgments about Transient Climate Response to Alternative Future Trajectories of Radiative Forcing,'' {\em Proceedings of the National Academy of Science} 107, 12451-12456.