Watch Your Step: Optimal Policy in a Tipping Climate

Abstract

We investigate the optimal policy response to the possibility of abrupt, irreversible shifts in system dynamics. The welfare cost of a tipping point emerges from the policymaker's response to altered system dynamics. Our policymaker also learns about a threshold's location by observing the system's response in each period. Simulations with a recursive, numerical climate-economy model show that tipping possibilities raise the optimal carbon tax more strongly over time. The resulting policy paths ultimately lower optimal peak warming by up to 0.5 • C. Different types of post-tipping shifts in dynamics generate qualitatively different optimal pre-tipping policy paths.JEL: Q54, D90, H23

Managing Climate Change Under Uncertainty: Recursive Integrated Assessment at an Inflection Point

“…Let s and t each be normally distributed and enter the temperature transition in a linear and separable fashion. In this case (which roughly matches nearly all of the literature to date), we have what is called a conjugate prior and thus know that the 9 Lemoine and Traeger (2014) use the value function to tease apart the different channels through which potential tipping points affect policy. Lemoine and Traeger (2016a) quantify the channels through which aversion to ambiguity about a tipping point's threshold affects policy.…”

“…The policy implications of tipping points that affect the physical climate system vary strongly over plausible consequences of tipping and over assumptions about our ability to learn about tipping points, either prior to triggering them (Lemoine and Traeger, 2014) or after having triggering them (Lemoine and Traeger, 2016b). These policy implications also depend on whether deploying "geoengineering" technologies can mitigate the consequences of tipping (Heutel et al, 2016).…”

“…Lemoine and Traeger (2014) approximate the omitted states as functions of the tracked states. Other papers have used finitehorizon methods that do not require iterating over the full grid of nodes as many times (e.g., .…”

Second-Best Renewable Subsidies to De-carbonize the Economy: Commitment and the Green Paradox

“…8 The damage function resulting from the DICE-07 model is almost distinguishable (up to 7 o C) from that of the DICE-2013R model (see http://www.econ.yale.edu/~nordhaus/homepage/Web-DICE-2013-April.htm). 9 We abstract from positive feedback and uncertain climate catastrophes (e.g., Lemoine and Traeger 2014;Lontzek et al 2015;van der Ploeg and de Zeeuw 2013).…”

The Economics of Tipping Points

“…This is a nice example because the climate system may tip, but there is high uncertainty. Interesting research has developed in analysing tipping points in integrated assessment models for climate change (e.g., Lemoine and Traeger 2014).…”