Epstein-Zin utility in DICE: Is risk aversion irrelevant to climate policy?

The authors develop a hybrid "EZ-DICE" model that replaces the standard constant relative risk aversion (CRRA) utility with Epstein-Zin utility, allowing for the independent calibration of risk aversion and time preference. Using a five-state model of uncertainty regarding climate sensitivity, the study finds that EZ-DICE results in a significantly higher social cost of carbon and more rapid carbon emission abatement compared to the standard DICE model. However, the results are remarkably insensitive to the level of risk aversion, which the authors attribute to DICE's optimistic assumptions that allow for the certain and low-cost prevention of the worst climate outcomes through immediate 100-percent abatement.

• The implementation of Epstein-Zin utility in the EZ-DICE model leads to a social cost of carbon (SCC) and a pace of emission reduction that are significantly higher than those produced by the conventional DICE utility function.
• Optimal climate policy in the EZ-DICE model is sensitive to the intertemporal elasticity of substitution (IES), where a larger IES increases the SCC and the speed of abatement.
• The EZ-DICE model results are remarkably insensitive to the level of risk aversion; changing the coefficient of relative risk aversion from 0 to 20 altered the SCC by 1% or less.
• The insensitivity to risk aversion is likely due to DICE's structural assumptions, which allow the model to avoid extreme damages by jumping to 100-percent abatement as soon as uncertainty is resolved.
• The primary effect of using Epstein-Zin utility in a model that truncates extreme risk is providing a theoretical rationale for discounting at the risk-free rate of return, which is typically lower than rates used in other climate analyses.

APA

Ackerman, F., Stanton, E. A., & Bueno, R. (2012). Epstein-Zin utility in DICE: Is risk aversion irrelevant to climate policy? Stockholm Environment Institute. https://www.sei.org/mediamanager/documents/Publications/Climate/E3-SEI-WP-2012-EZ-utility-in-DICE.pdf

Chicago

Ackerman, Frank, Elizabeth A. Stanton, and Ramón Bueno. Epstein-Zin utility in DICE: Is risk aversion irrelevant to climate policy? Stockholm Environment Institute, 2012. https://www.sei.org/mediamanager/documents/Publications/Climate/E3-SEI-WP-2012-EZ-utility-in-DICE.pdf.

Wikipedia

{{cite report |last1=Ackerman |first1=Frank |last2=Stanton |first2=Elizabeth A. |last3=Bueno |first3=Ramón |title=Epstein-Zin utility in DICE: Is risk aversion irrelevant to climate policy? |publisher=Stockholm Environment Institute |date=March 2012 |url=https://www.sei.org/mediamanager/documents/Publications/Climate/E3-SEI-WP-2012-EZ-utility-in-DICE.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{ackerman2012epsteinzin, author = {Ackerman, Frank and Stanton, Elizabeth A. and Bueno, Ramón}, title = {{Epstein-Zin utility in DICE: Is risk aversion irrelevant to climate policy?}}, institution = {Stockholm Environment Institute}, year = {2012}, month = mar, url = {https://www.sei.org/mediamanager/documents/Publications/Climate/E3-SEI-WP-2012-EZ-utility-in-DICE.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }