Regional IAM: analysis of risk-adjusted costs and benefits of climate policies

The authors argue that conventional cost-benefit analysis (CBA) fails to account for the value of flexibility and the irreversibility of climatic events. By applying real option analysis to the DICER model, they incorporate the 'cost of lost flexibility' as a penalty function. Their results indicate that accounting for risk leads to a more aggressive mitigation pathway, reducing the optimal end-of-century temperature increase from approximately 2.5°C in deterministic scenarios to about 2.25°C.

• The authors propose a risk-adjusted approach using real option analysis (ROA) to account for 'correction costs', which represent the value of lost flexibility caused by the path-dependency and irreversibility of climate change.
• The proposed methodology adds a penalty function to the deterministic run of an IAM, consisting of at-the-money call options on 'adaptation services' (for damages) and carbon credits (for abatement costs).
• Using the DICER model, the authors find that risk-adjusted parameters lower the optimal temperature increase by the end of the century to approximately 2.25°C, compared to about 2.5°C in deterministic scenarios.
• Risk-adjusted solutions distribute emission reductions unevenly across regions; China is identified as needing the most aggressive cuts over the next 40 years to balance risks.
• The application of risk-adjusted parameters significantly reduces 'tail risk' and overall uncertainty regarding atmospheric temperature, although the optimal CO2 concentration still exceeds 450 ppm.

APA

Golub, A., Lugovoy, O., Markandya, A., Ortiz, R. A., & Wang, J. (2013). Regional IAM: analysis of risk-adjusted costs and benefits of climate policies. Basque Centre for Climate Change. https://www.bc3research.org/h6T8Uy8Nm4gFs0O/201303060440191982488509.pdf

Chicago

Golub, Alexander, Oleg Lugovoy, Anil Markandya, Ramon Arigoni Ortiz, and James Wang. Regional IAM: analysis of risk-adjusted costs and benefits of climate policies. Basque Centre for Climate Change, 2013. https://www.bc3research.org/h6T8Uy8Nm4gFs0O/201303060440191982488509.pdf.

Wikipedia

{{cite report |last1=Golub |first1=Alexander |last2=Lugovoy |first2=Oleg |last3=Markandya |first3=Anil |last4=Ortiz |first4=Ramon Arigoni |last5=Wang |first5=James |title=Regional IAM: analysis of risk-adjusted costs and benefits of climate policies |publisher=Basque Centre for Climate Change |date=February 2013 |url=https://www.bc3research.org/h6T8Uy8Nm4gFs0O/201303060440191982488509.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{golub2013regional, author = {Golub, Alexander and Lugovoy, Oleg and Markandya, Anil and Ortiz, Ramon Arigoni and Wang, James}, title = {{Regional IAM: analysis of risk-adjusted costs and benefits of climate policies}}, institution = {Basque Centre for Climate Change}, year = {2013}, month = feb, url = {https://www.bc3research.org/h6T8Uy8Nm4gFs0O/201303060440191982488509.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }