ACE – Analytic Climate Economy (with Temperature and Uncertainty)

72 Pages Posted: 9 Jan 2019 Last revised: 24 Jan 2019

See all articles by Christian P. Traeger

Christian P. Traeger

University of Oslo - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute; University of Oslo - Ragnar Frisch Centre for Economic Research; University of California, Berkeley - Department of Agricultural & Resource Economics

Multiple version iconThere are 2 versions of this paper

Date Written: December 1, 2018

Abstract

This paper is a revised version of: https://ssrn.com/abstract=2667972.

The Analytic Climate Economy (ACE) closes a gap between analytic climate change assessments and quantitative numeric integrated assessment models (IAMs) used in policy advising. Its closed-form solution links IAM components and parametric assumptions directly to their policy impacts. Its analytic nature overcomes Bellman's curse of dimensionality for a wide range of stochastic processes. ACE shows that uncertainty flips the main drivers of the carbon tax. Uncertainty also makes IAMs even more sensitive to the discount rate and its composition. Under a recent survey's median estimate for pure time preference, uncertainty almost triples the optimal tax.

Keywords: climate change, integrated assessment, uncertainty, learning, risk aversion, recursive utility, social cost of carbon, carbon tax, carbon cycle, climate sensitivity, stochastic volatility, autoregressive gamma

JEL Classification: Q54, H43, E13, D80, D61

Suggested Citation

Traeger, Christian P., ACE – Analytic Climate Economy (with Temperature and Uncertainty) (December 1, 2018). Available at SSRN: https://ssrn.com/abstract=3307622 or http://dx.doi.org/10.2139/ssrn.3307622

Christian P. Traeger (Contact Author)

University of Oslo - Department of Economics ( email )

Norway

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 81679
Germany

University of Oslo - Ragnar Frisch Centre for Economic Research ( email )

Gaustadalleen 21
N-0317 Oslo
Norway

University of California, Berkeley - Department of Agricultural & Resource Economics ( email )

Berkeley, CA 94720
United States

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