Uncertainty in the Analytic Climate Economy

74 Pages Posted: 9 Jun 2021 Last revised: 23 Jun 2021

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

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2021

Abstract

The paper analyzes optimal climate policy under uncertainty. It endows a recent quantitative analytic integrated assessment model (IAM) with long-run risk, adapting methods from the asset pricing literature to deal with endogenous climate risk. The model solves in closed-form for general degrees of risk aversion, stochastic climate feedbacks, and a stochastic damage-adaptation process. The model permits an exact solution of the infinite horizon stochastic fixed-point problem of a complex IAM. The approach facilitates new quantitative evidence for the role of uncertainty as well as analytic insights into the drivers and sensitivities of the optimal carbon tax facing an uncertain future.

Keywords: climate change, integrated assessment, uncertainty, risk aversion, recursive utility, social cost of carbon, carbon tax, carbon cycle, temperature, damages, adaptation, climate sensitivity, long-run risk, endogenous risk, stochastic volatility, autoregressive gamma

JEL Classification: Q54, H23, H43, E13, D80, D61

Suggested Citation

Traeger, Christian P., Uncertainty in the Analytic Climate Economy (March 1, 2021). Available at SSRN: https://ssrn.com/abstract=3832735 or http://dx.doi.org/10.2139/ssrn.3832735

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, 01069
Germany

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