Incorporating Path Dependency into Decision-Analytic Methods: An Application to Global Climate-Change Policy

Abstract

Climate policy decisions are necessarily sequential decisions over time under uncertainty, given the magnitude of uncertainty in both economic and scientific processes, the decades-to-centuries time scale of the phenomenon, and the ability to reduce uncertainty and revise decisions along the way. Thus, an appropriate choice of analytical method is decision analysis. However, applying decision analysis in the context of idealized government decision makers over a century raises the question of how to deal with the fact that political systems tend to exhibit path dependency, a force that makes large policy shifts difficult and rare, and limits most decisions to small incremental changes. This paper explores the effect of considering path dependency in an application of decision analysis to climate-change policy decisions, presenting two alternative methods for modeling path dependency. I demonstrate that consideration of path dependence in the context of climate policy justifies greater near-term emissions reductions. The more general result of path-dependency is to shift the near-term strategy towards a more moderate hedging strategy, because drastic shifts later will be difficult.

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