Integrated Assessment Models

How economists build models linking the economy, emissions and climate to estimate the best climate policy, and the criticisms of these models.

To decide how much to cut emissions, economists need to compare the costs of cutting with the benefits of avoided damage. Integrated assessment models, or IAMs, combine economics and climate science to do this.

How they work

An IAM links several parts:

The economy: output, growth and investment.
Emissions: how economic activity produces greenhouse gases.
The climate: how emissions change concentrations and temperatures.
Damages: how higher temperatures reduce economic output, through a damage function.
Policy: how cutting emissions costs money but reduces future damage.

The model then searches for the path of emission cuts, or carbon prices, that maximises long-term wellbeing.

The DICE model

William Nordhaus developed one of the best-known IAMs, the DICE model, short for Dynamic Integrated Climate-Economy model, first published in the early 1990s. He received the Nobel prize in 2018 for integrating climate change into long-run economic analysis. IAMs have been used by governments to estimate the social cost of carbon.

Criticisms

Damage functions: the relationship between temperature and economic damage is highly uncertain, especially at high temperatures. Some critics argue models have underestimated damages.
Tipping points: many models poorly capture the risk of sudden, irreversible changes.
Discount rates: results depend heavily on the chosen discount rate.
False precision: critics, including economist Robert Pindyck, argue IAMs give an illusion of precision about deeply uncertain questions.

Updates

Newer versions of models have raised estimated damages and recommended stronger action. Nordhaus’s own updated model in the late 2010s suggested more ambitious cuts than earlier versions.

Balancing costs and benefits

An IAM might find that cutting emissions by 10 percent this decade costs little and avoids significant future damage, but cutting by 90 percent immediately would be extremely expensive relative to the damage avoided. The model looks for the balance where the extra cost of cutting more equals the extra damage avoided.

Thinking model results are certain predictions

IAMs are tools for organising thinking about trade-offs, not precise forecasts. Their results depend on uncertain assumptions about damages, technology and discounting.

Key takeaways

Integrated assessment models link the economy, emissions, climate and damages.
Nordhaus's DICE model is among the best known; he won the 2018 Nobel prize.
IAMs are used to estimate the social cost of carbon.
Critics highlight uncertain damage functions, tipping points and false precision.