The Case for Adaptive Decision Strategies

Much of the current policy and political debate about climate change focuses on the question of how much to reduce emissions of anthropogenic greenhouse gases. The Framework Convention on Climate Change, in particular the protocol negotiated in Kyoto in December 1997, now calls for the world's developed countries (Annex I nations in the protocol) to commit to binding reductions that would bring their emissions back to roughly 1990 levels by 2010. It does little damage to the nuances of the debate to divide most of the responses to this protocol into two opposing camps. Supporters argue that the risk of severe impacts from climate change is sufficiently high, and the prospects of inexpensive abatement due to technology innovation and social change sufficiently good, that immediate and significant reductions in emissions are the only prudent course. Opponents point to the potentially high economic costs of emissions reductions and the large uncertainties surrounding the predicted damages, and argue that little or no action be taken at this time.1

Numerous quantitative policy studies have attempted to determine the relative validity of these competing arguments. Many take the Kyoto targets as a given and attempt to predict the economic cost of meeting them. These estimates cover a wide range, depending on assumptions about diverse factors, such as how the protocol is implemented and the market acceptance of efficiency-enhancing and emissions-reducing technologies (Repetto and Austin, 1997). In addition, many analytic efforts have been made to determine the best arrangements for the emissions trading and other policies that may be used to implement the protocol. For instance, economic studies generally argue that allowing countries to trade emissions permits among themselves will lower the costs relative to requiring each country to meet its reduction target individually.

More broadly, other studies address the question of whether or not the Kyoto targets represent the most cost-effective first steps towards the Climate Convention's ultimate goal of long-term stabilization of atmospheric concentrations of greenhouse gases. The influential study by Wigley, Richels, and Edmonds (Wigley et al., 1996 - hereafter WRE) argued that the Convention's goals can be met at least cost with near-term emissions reductions much smaller than those required by Kyoto. In response, a number of studies have questioned the assumptions underlying WRE. In particular, these rebuttals argue that alternative, plausible assumptions about the speed and characteristics of technology innovation suggest that, given the large time scales associated with changing energy-related capital infrastructure and the feedback effects whereby early investments in new technology can reduce subsequent costs, Kyoto's emissions reductions would be beneficial.

It is not at all clear that the question of the best level of near-term emissions reductions can be resolved by this type of argument. Ultimately, the predicted benefit of such reductions depends on a broad range of assumptions about the seriousness of potential impacts due to climate change, the potential of new

1 There are, of course, additional debates over topics such as the extent to which the fast-growing developing countries ought to bear the burden of emissions reductions, the extent to which developed countries can pay others to make emissions reductions for them, and the best means to reward those firms that voluntarily commit to early actions.

emissions-reducing technologies, the value people in the future will place on the preservation of nature, the extent to which market reforms succeed in many developing countries, and a host of other factors that are impossible to predict with any accuracy. Thus, the studies that favor and oppose particular levels of emissions reductions often differ, not so much because of any disparities in the underlying methodology, but in the basic assumptions they make about the future. Because a wide range of such assumptions is plausible, the studies cannot distinguish among a wide range of potential policy proposals. Furthermore, such studies will provide little basis for agreement among competing sides in the climate-change-policy debate, since each stakeholder will, not surprisingly, tend to gravitate towards those assumptions that justify the level of emissions-reductions they would otherwise support on ideological, financial, or other grounds.

The concept of adaptive-decision strategies offers a way out of this impasse. Rather than base prescriptions for the proper level of emissions reduction on a judgment that WRE is or is not correct, or that some new emissions-reducing technology will or will not achieve substantial market penetration, we look to strategies that begin with a certain suite of actions, monitor the external environment, and then modify the suite in response to these observations. Rather than predict what the level of emissions will be in future decades, we determine what type of adaptive-decision strategy will perform best across a wide range of potential futures, each of which, in retrospect, clearly requires some different level of emissions reduction.

Simple and obvious as this point may seem at first, it is actually a substantial reconfiguration of the policy problem because it suggests that policymakers consider a wider set of potential policy actions and a different set of information about the world than they are encouraged to do in the standard analytic framework. Perhaps this can best be seen by comparing the concept of adaptive-decision strategies to the related, analytic approach of sequential-decision strategies which more commonly appears in the climate-change-policy literature (Manne and Richels, 1992; Nordhaus, 1994; Hammitt, Lempert, and Schlesinger, 1992 - hereafter HLS). The sequential-decision approach finds an optimum strategy assuming that policy-makers begin with uncertainty but will receive a specific dollop of uncertainty-reducing information at some fixed time in the future. For instance, HLS consider two-period decision strategies that start with imperfect information about the future costs of climate change and the costs of abatement, with the uncertainty resolved completely in ten years. Generally such a study suggests some modest adjustment to the strategy one would pursue without uncertainty, such as a slightly increased level of near-term emissions reductions.

A sequential-decision strategy assumes that the rate at which policy-makers learn is independent of the seriousness of the problem or of actions they take. But the dependence of what we learn tomorrow on both what we do today and the possible paths the world offers to us may be important factors in choosing a response strategy. For instance, a key determinant of the proper level of near-term emissions reductions ought to be whether or not society can achieve sufficient warning time to respond to signals of adverse climate change. With sufficient warning time, near-term emissions can be lower; without it they should be higher. If climate change is modest, it may take decades to extract the signal from the noise. But if climate change is severe, the signal may well be revealed more quickly. Similarly, near-term emission reductions will likely generate information about abatement costs that can help us better determine the proper level of emissions reductions. Including such considerations in the calculations will affect analysts' recommendations as to the best level of near-term emissions reductions.

Considering strategy as an evolutionary process can also significantly affect the types of actions we consider and the criteria we use to judge those actions. For instance, a key question in the design of adaptive-decision strategies is the information to which decision-makers ought to pay attention. For example, the US Federal Reserve follows an adaptive-decision strategy as it periodically adjusts interest rates to regulate the growth of the US economy. Much attention is paid to the information and indicators the Fed governors use to make their decisions and, when the Fed chairman makes comments that additional information will be deemed important, the markets can react strongly. In fact, sometimes indicators alone can be a large step towards the solution. One of the most striking examples was the US EPA's policy of requiring companies to publish their toxic-release inventories. This communication of information itself reduced emissions, without any other regulation, because companies felt shamed by high numbers.

Perhaps most importantly, the response of real-world decision-makers to deep uncertainty is often not any particular action, but rather on building processes that can respond to uncertainty. This in the broadest sense is what we mean by an adaptive-decision strategy. In his review of risk assessment, William Clark (1980) emphasizes the importance of rules of evidence and other such processes in determining how we perceive and respond to risk. The business literature often recommends organizational changes, designed to increase the firm's ability to respond to new information, as the best response to uncertainty and rapid change. This theme of information flows and how to use them is central to the idea of an adaptive-decision strategy. It may be that the most important responses to the threat of climate change are the establish ment of the institutional mechanisms that allow society to respond more quickly and less expensively to opportunities and threats in the decades ahead.

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