Disutility of Climate Change Damages May Warrant Much Stricter Climate Targets

Cost-benefit integrated assessment models (IAMs) inform the policy deliberation process by determining cost-optimal greenhouse gas emission reduction pathways based on economic considerations. These models seek to maximise economic utility and treat estimates of climate impacts (damages) and mitigation costs at par as GDP losses, having the same impact on utility reduction. However, prospect theory suggests that a certain level of climate damages could be valued higher by society than the same level of mitigation costs, as climate damages often occur as sudden unexpected events. In this paper, we show how this concept could be taken into account in cost-benefit IAMs and explore possible consequences on optimal mitigation pathways. Our results suggest that compared to the standard utility approach, capturing explicit aversion to climate impact incidence shows optimal pathways with earlier and deeper emission reduction, lowering both net-negative emissions and mid-century temperature peaks in line with stringent Paris Agreement targets.