2.6.2 Uncertainty as a frame for distributional and equity aspects

Gollier, 2001 outlines a framework for assessing the equity implications of climate change uncertainty, where he considers risk aversion for different income groups. The proposition (generally supported by empirical evidence) is that the relative risk aversion of individuals decreases with increasing wealth (Gollier, 2001), implying that the compensation that an individual asks for in order to accept a risk decreases relative to his income with increasing income. However, the absolute risk aversion – or the total compensation required in order to accept a risk – increases with wealth. It means that a given absolute risk level is considered to be more important to poorer people than to richer, and the comparatively higher risk aversion of poorer people suggests that larger investments in climate change mitigation and adaptation policies are preferred if these risks are borne by the poor rather than the rich.

A similar argument can be applied in relation to the equity consequences of increased climate variability and extreme events. Climate change may increase the possibility of large, abrupt and unwelcome regional or global climatic events. A coping strategy against variability and extreme events can be income-smoothing measures, where individuals even out their income over time through savings and investments. Poorer people with a lower propensity to save, and with less access to credit makers, have smaller possibilities to cope with climate variability and extreme events through such income-smoothing measures, and they will therefore be more vulnerable.