Optimal Control of a Global Model of Climate Change with Adaptation and Mitigation

Abstract

The Integrated Assessment Model (IAM) has extensively treated the adverse effects of climatechange and the appropriate mitigation policy. We extend such a model to include optimalpolicies for mitigation, adaptation and infrastructure investment studying the dynamics of thetransition to a low fossil-fuel economy. We focus on the adverse effects of increase inatmospheric CO2 concentration on households. Formally, the model gives rise to an optimalcontrol problem of finite horizon consisting of a dynamic system with five-dimensional statevector consisting of stocks of private capital, green capital, public capital, stock of brownenergy in the ground, and emissions. Given the numerous challenges to climate change policiesthe control vector is also five-dimensional. Our solutions are characterized by turnpikeproperty and the optimal policy that accomplishes the objective of keeping the CO2 levelswithin bound is characterized by a significant proportion of investment in public capital goingto mitigation in the initial periods. When initial levels of CO2 are high, adaptation efforts alsostart immediately, but during the initial period, they account for a smaller proportion ofgovernment's public investment.