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

This research paper introduces a hybrid "EZ-DICE" model that implements Epstein-Zin recursive utility into the Dynamic Integrated Climate-Economy (DICE) model. The authors aim to separate risk aversion from time preference, a conflation present in standard expected-utility frameworks that often leads to a perverse relationship where higher risk aversion implies less concern for future outcomes.

• The implementation of Epstein-Zin utility in the EZ-DICE model results in an optimal climate policy that requires significantly more rapid carbon emission abatement and higher carbon prices compared to the standard DICE model.
• In the EZ-DICE model, results are notably sensitive to the intertemporal elasticity of substitution (IES), where a higher IES increases the social cost of carbon (SCC) and the pace of abatement by placing greater weight on future outcomes.
• The EZ-DICE model is 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 and the 2075 abatement rate by less than 2 percentage points.
• The insensitivity to risk aversion is attributed to DICE's optimistic assumptions regarding mitigation, which allow the model to avoid extreme future damages by jumping to 100-percent abatement as soon as uncertainty is resolved.
• The authors find that the primary contribution of Epstein-Zin utility in a model like DICE is providing a rationale for discounting at the risk-free rate, which is lower than rates used in many other climate analyses.
• The study concludes that current integrated assessment models like DICE may overlook the most critical risks because they assume catastrophic temperature increases can be prevented with certainty and at limited cost.

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} }