A Simple Framework for Climate-Change Policy Under Model Uncertainty

25 Pages Posted: 4 Apr 2017

See all articles by Stergios Athanasoglou

Stergios Athanasoglou

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS); Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

Valentina Bosetti

Bocconi University; CMCC - Euro Mediterranean Centre for Climate Change

Laurent Drouet

Fondazione Eni Enrico Mattei (FEEM)

Date Written: April 3, 2017

Abstract

We propose a novel framework for the economic assessment of climate-change policy. Our main point of departure from existing work is the adoption of a "satisficing", as opposed to optimizing, modeling approach. Along these lines, we place primary emphasis on the extent to which different policies meet a set of goals at a specific future date instead of their performance vis-à-vis some intertemporal objective function. Consistent to the nature of climate-change policy making, our model takes explicit account of model uncertainty. To this end, the value function we propose is an analogue of the well-known success-probability criterion adapted to settings characterized by model uncertainty. We apply this decision criterion to probability distributions constructed by Drouet et al. (2015) linking carbon budgets to future consumption. The main result that emerges is the superiority of "medium" carbon budgets in line with a 3°C target (i.e., 2000-3000 GtCO2) in preventing large future consumption losses with high probability. Insights from computational geometry facilitate computations considerably, and allow for the efficient application of the model in high-dimensional settings.

Keywords: Satisficing, Model Uncertainty, Climate Change, Computational Geometry

JEL Classification: C60, D81, Q42, Q48

Suggested Citation

Athanasoglou, Stergios and Bosetti, Valentina and Drouet, Laurent, A Simple Framework for Climate-Change Policy Under Model Uncertainty (April 3, 2017). FEEM Working Paper No. 13.2017. Available at SSRN: https://ssrn.com/abstract=2945341 or http://dx.doi.org/10.2139/ssrn.2945341

Stergios Athanasoglou (Contact Author)

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milano, 20126
Italy

Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

U6 Building
Viale Piero e Alberto Pirelli, 22
Milano, 20126
Italy

Valentina Bosetti

Bocconi University

Via Gobbi 5
Milan, 20136
Italy

CMCC - Euro Mediterranean Centre for Climate Change

via Augusto Imperatore, 16
Lecce, I-73100
Italy

Laurent Drouet

Fondazione Eni Enrico Mattei (FEEM) ( email )

C.so Magenta 63
Milano, 20123
Italy

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