TY - JOUR
AU - Lemoine,Derek M.
AU - Traeger,Christian P.
TI - Tipping Points and Ambiguity in the Economics of Climate Change
JF - National Bureau of Economic Research Working Paper Series
VL - No. 18230
PY - 2012
Y2 - July 2012
UR - http://www.nber.org/papers/w18230
L1 - http://www.nber.org/papers/w18230.pdf
N1 - Author contact info:
Derek M. Lemoine
Department of Economics, University of Arizona
McClelland Hall 401
1130 E Helen St
Tucson, AZ 85721-0108
Tel: 520-621-2164
Fax: 520-621-8450
E-Mail: dlemoine@email.arizona.edu
Christian P. Traeger
ARE, 207 Giannini Hall
University of California
Berkeley, CA 94709
E-Mail: traeger@berkeley.edu
M3 - presented at "SI 2011 Environmental & Energy Economics", July 29-30, 2011
AB - We model welfare-maximizing policy in an infinite-horizon setting 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.
ER -