Long-Term-Risks

Evaluation and management of collective long-term risks

ERC grant n°230589

Project summary

A striking aspect of the recent debate on the climate change is the transfer of the hottest scientific challenges from the so-called hard sciences (climatology, oceanography, chemistry,…) to economics. Still, the economic community is much divided on the way to approach long-term environmental risks. The absence of consensus about the efficient public policy for the environment may be explained by several factors. First, for many of the underlying long term environmental risks, there is still a lot of scientific uncertainty about their intensity and their impact on the welfare of future generations. Moreover, people have heterogeneous beliefs about the probabilities of really catastrophic consequences of various environmental policies. Second, based on these uncertainties, people disagree about whether we should wait or not to get better information before implementing strong actions. Third there is much disagreement about how much effort we should be done to improve the environment available for future generations. The bottom line is that there is no agreed-upon rule to evaluate long-term environmental risks and therefore no consensus about how to shape the environmental policy.

The aim of this research is to provide a unified scientific framework to evaluate and to make policy recommendations for collective long-term risks. This research is also aimed at helping collective decision making by improving the standard tools of benefit-cost analysis for the specificities of long-term risks: discounting of far distant effects, risk premium for fat tails, ambiguity premium, aggregation rules for heterogeneous beliefs and preferences, and option values. We will translate general concepts such as ‘sustainable development”, ‘corporate social responsibility” and “precautionary principle” into efficient guidelines for collective decision making.


Project dates: 01/01/2009 – 31/12/2013

TSE contact: Christian GOLLIER