Journal
EUROPEAN ECONOMIC REVIEW
Volume 69, Issue -, Pages 104-125Publisher
ELSEVIER SCIENCE BV
DOI: 10.1016/j.euroecorev.2014.01.008
Keywords
Integrated assessment of climate change; Growth uncertainty; Social cost of carbon; Risk aversion; Epstein-Zin-Weil preferences
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Funding
- Directorate For Geosciences [1240507] Funding Source: National Science Foundation
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Economic growth over the coming centuries is one of the major determinants of today's optimal greenhouse gas mitigation policy. At the same time, long-run economic growth is highly uncertain. This paper is the first to evaluate optimal mitigation policy under long-term growth uncertainty in a stochastic integrated assessment model of climate change. The sign and magnitude of the impact depend on preference characteristics and on how damages scale with production. We explain the different mechanisms driving optimal mitigation under certain growth, under uncertain technological progress in the discounted expected utility model, and under uncertain technological progress in a more comprehensive asset pricing model based on Epstein-Zin-Weil preferences. In the latter framework, the dominating uncertainty impact has the opposite sign of a deterministic growth impact; the sign switch results from an endogenous pessimism weighting. All of our numeric scenarios use a DICE based assessment model and find a higher optimal carbon tax than the deterministic DICE base case calibration. (C) 2014 Elsevier BM. All rights reserved.
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