Tipping points and ambiguity in the economics of climate change

We model optimal policy when the probability of a tipping point, the welfare change due to a tipping point, and knowledge about a tipping point's trigger all depend on the policy path. Analytic results demonstrate how optimal policy depends on the ability to affect both the probability of a tipping point and also welfare in a post-threshold world. Simulations with a numerical climate-economy model show that possible tipping points in the climate system increase the optimal near-term carbon tax by up to 45% in base case specifications. The resulting policy paths lower peak warming by up to 0.5 C compared to a model without possible tipping points. Different types of tipping points have qualitatively different effects on policy, demonstrating the importance of explicitly modeling tipping points' effects on system dynamics. Aversion to ambiguity in the threshold's distribution can amplify or dampen the effect of tipping points on optimal policy, but in our numerical model, ambiguity aversion increases the optimal carbon tax.


Issue Date:
Dec 28 2011
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/120349
Total Pages:
40
JEL Codes:
Q54; D90; D81
Note:
Replaces CUDARE Working Paper no. 1111, with the title; Tipping Points and Ambiguity in the Integrated Assessment of Climate Change, issued 12-26-2010
Series Statement:
CUDARE Working Papers
1111R




 Record created 2017-04-01, last modified 2017-08-26

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