Delayed Action and Uncertain Targets: How Much Will Climate Policy Cost?

24 Pages Posted: 21 Feb 2009

See all articles by Valentina Bosetti

Valentina Bosetti

Bocconi University; CMCC - Euro Mediterranean Centre for Climate Change

Carlo Carraro

Fondazione Eni Enrico Mattei (FEEM); Ca' Foscari University of Venice; CMCC - Euro Mediterranean Centre for Climate Change (Climate Policy Division); IPCC; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Centre for European Policy Studies, Brussels; Green Growth Knowledge Platform; International Center for Climate Governance

Alessandra Sgobbi

Fondazione Eni Enrico Mattei (FEEM) ; CMCC - Centro Euro-Mediterraneo sui Cambiamenti Climatici

Massimo Tavoni

Fondazione Eni Enrico Mattei (FEEM); Princeton University - Princeton Environmental Institute

Multiple version iconThere are 5 versions of this paper

Date Written: November 24, 2008

Abstract

Despite the growing concern about actual on-going climate change, there is little consensus about the scale and timing of actions needed to stabilise the concentrations of greenhouse gases. Many countries are unwilling to implement effective mitigation strategies, at least in the short-term, and no agreement on an ambitious global stabilisation target has yet been reached. It is thus likely that some, if not all countries, will delay the adoption of effective climate policies. This delay will affect the cost of future policy measures that will be required to abate an even larger amount of emissions. What additional economic cost of mitigation measures will this delay imply? At the same time, the uncertainty surrounding the global stabilisation target to be achieved crucially affects short-term investment and policy decisions. What will this uncertainty cost? Is there a hedging strategy that decision makers can adopt to cope with delayed action and uncertain targets? This paper addresses these questions by quantifying the economic implications of delayed mitigation action, and by computing the optimal abatement strategy in the presence of uncertainty about a global stabilisation target (which will be agreed upon in future climate negotiations). Results point to short-term inaction as the key determinant for the economic costs of ambitious climate policies. They also indicate that there is an effective hedging strategy that could minimise the cost of climate policy under uncertainty, and that a short-term moderate climate policy would be a good strategy to reduce the costs of delayed action and to cope with uncertainty about the outcome of future climate negotiations. By contrast, an insufficient short-term effort significantly increases the costs of compliance in the long-term.

Keywords: Uncertainty, Climate Policy, Stabilisation Costs, Delayed Action

JEL Classification: C72, H23, Q25, Q28

Suggested Citation

Bosetti, Valentina and Carraro, Carlo and Sgobbi, Alessandra and Tavoni, Massimo, Delayed Action and Uncertain Targets: How Much Will Climate Policy Cost? (November 24, 2008). University Ca' Foscari of Venice, Dept. of Economics Research Paper Series No. 27/WP/2008, Available at SSRN: https://ssrn.com/abstract=1306363 or http://dx.doi.org/10.2139/ssrn.1306363

Valentina Bosetti (Contact Author)

Bocconi University

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CMCC - Euro Mediterranean Centre for Climate Change

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Carlo Carraro

Fondazione Eni Enrico Mattei (FEEM) ( email )

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Alessandra Sgobbi

Fondazione Eni Enrico Mattei (FEEM) ( email )

Corso Magenta 63
20123 Milan
Italy

CMCC - Centro Euro-Mediterraneo sui Cambiamenti Climatici ( email )

via Augusto Imperatore, 16
Lecce, I-73100
Italy

Massimo Tavoni

Fondazione Eni Enrico Mattei (FEEM) ( email )

Corso Magenta 63
20123 Milan
Italy

Princeton University - Princeton Environmental Institute

22 Chambers Street
Princeton, NJ 08544-0708
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