Files
Abstract
The effects of anthropogenic greenhouse gas emission to climate change are uncertain; how does
this uncertainty affect the optimal carbon abatement policy? Tackling this classic problem is
challenging; not only does it require integrated assessment analyses that consolidate an
adequate representation of both climate and economy, but also a sensible understanding
of hedging incentives and decision making under uncertainty. In the Integrated Assessment
Model (IAM) community, this representation is severely restricted by computational
burdens and model intractability (Webster, Santen, and Parpas, 2012). I provide a minimal
framework that relies on the transparency of mathematical programming, to assess
precautionary mitigation as a means to hedge against the risk and uncertainty of climate
catastrophes. The scope of the paper encompasses the following: assessment of optimal abatement under parameter uncertainty and endogenous learning; decomposition of optimal abatement with respect to mitigatory incentives; assessment of policy sensitivity to assumed distributions of uncertain temperature
thresholds.
I introduce DICESC, a multistage stochastic control version of Nordhaus’ DICE model
to demonstrate that policy optimization in which the hazard rates of climate catastrophes
can be controlled significantly increases incentives for precautionary abatement. Despite
the drastic level increase in precautionary abatement the proposed formulation achieves,
I stress the importance of understanding the distributive properties of uncertainty for the
robust assessment of optimal policy.