1.1 ACE – Analytic Climate Economy.
(Forthcoming in AEJ: Ecomic Policy) |
|
Short:
The Analytic Climate Economy (ACE) closes a gap between complex numeric integrated assessment models used in policy advising and stylized models built for analytic insight. It connects a general production system relying on a variety of energy sectors to a climate system explicitly tracking carbon emissions, greenhouse effect, and temperature dynamics. The paper discusses how model components and calibration assumptions affect the optimal carbon taxes and shows that different reasonable calibrations can lead to vastly different optimal taxes.
(collapse)
Full Abstract:
The paper derives the optimal carbon tax from a comprehensive integrated assessment model (IAM) in closed form. The model links IAM components and parametric assumptions directly to their policy impacts. Novel to analytic IAMs are the
explicit temperature dynamics, a general economy, energy sectors including capital, various degrees of substitutability across energy sources, aspects of capital persistence, and objective functions including CES preferences and population weighting. In particular, I discuss the distinct roles of carbon and temperature dynamics in determining the optimal tax level. The analytic non-linear temperature model is at the forefront of the models used in policy advising. A distinction between consumption and investment sectors plays an important role for model calibration. I use the see-through model to quantify and discuss various aspects of IAM calibrations. ACE opens the door to tractable forward-looking stochastic modeling and dynamic strategic interactions in complex IAMs, explored in accompanying work.
Full Abstract |
|
|
1.2 Uncertainty in the Analytic Climate Economy.
|
|
Short:
The paper analyzes the optimal carbon tax under uncertainty about carbon dynamics, temperature response, and climate damages. Building on the Analytic Climate Economy (ACE), I derive a general stochastic solution for an arbitrary degree of Arrow-Pratt risk aversion, which I disentangle from the base model's intertemporal elasticity of substitution (Epstein-Zin preferences).
Temperature dyanmics as opposed to carbon dynamics becomes the crucial driver of the risk premium and the stochastic model is even more senstivity to time preference than the deterministic model.
(collapse)
Full Abstract:
The paper derives the optimal carbon tax from a comprehensive integrated assessment model (IAM) in closed form. The solution links IAM components and parametric assumptions directly to their policy impacts. It facilitates stochastic analysis and highlights the interaction between elements that compound the optimal tax. Uncertainty makes IAMs even more sensitive to the discount rate and its composition. Using a recent survey’s median estimate for pure time preference, the endogenous climate uncertainty almost triples the optimal tax.
Full Abstract |
|
|
1.3
Pricing Climate Risk. With Svenn Jensen. |
|
Short:
We derive a general formula for the risk premium on the optimal carbon price in response to the large uncertainties surrounding the climate's sensitivity to antropogenic emissions. The formula expands simple precautionary savings analysis to more complex economic interactions, and it trains economic intuition about policy response to uncertainty.
(collapse) Full Abstract:
Anthropogenic greenhouse gas emissions are changing the energy balance of our planet. Various climatic feedbacks make the resulting warming over the next decades and centuries highly uncertain. We derive a general analytic formula for the “risk premium” on the resulting climate policy. It clarifies the distinct roles of risk aversion, prudence, characteristics of the damage formulation, and future policy response. More generally, the formula expands simple precautionary savings analysis to more complex economic interactions, and it trains economic intuition about policy making under uncertainty. The formula relies on approximations. We compare the results to the optimal policy in a recursive stochastic dynamic programming implementation of DICE. Our analytic formula implies only small errors, clarifies the relative importance of the different risk channels and structural assumptions, and allows researchers to derive estimates of uncertainty’s policy impact from deterministic models.
Full Abstract |
|
|
1.4
Smart Cap. With Larry Karp. |
|
Short:
We introduce a “smart” cap and trade system that eliminates the welfare costs of asymmetric information (“uncertainty”). The cap endogenously responds to technology or macroeconomic shocks based on observed trading prices. We explain why optimal carbon prices have to respond much more sensitivitly to emission fluctuations than suggested by the slope of the social cost of carbon. (collapse) Full Abstract:
We introduce a “smart” cap and trade system that eliminates the welfare costs of asymmetric information (“uncertainty”). This cap responds endogenously to technology or macroeconomic shocks, relying on
the market price of certificates to aggregate information. It allows policy makers to modify existing institutions to achieve more efficient emission reductions. The paper also shows that the efficient carbon price is more sensitive to technological innovations than usually assumed. The lasting impact and slow diffusion of these innovations typically make the optimal carbon price a much steeper function of emissions than suggested by the social cost of carbon.
Full Abstract |
|
|
1.5
Prices Versus Quantities Reassessed. With Larry Karp. |
|
Short:
The paper discusses the welfare costs of tax versus cap and trade-based regulation of greenhouse gases. We explain why the favoring of taxes based on Weitzman's (1974) “Prices versus quantities” argument is misleading. Persistence of greenhouse gases and technological innovations favor cap and trade.
(collapse) Full Abstract:
“Prices versus quantities” (Weitzman 1974), a hugely influential paper, is widely cited (and taught) in current debates about the best policy to reduce greenhouse gas emissions. The paper’s criterion for ranking policies suggests that technological uncertainty favors taxes over cap and trade. Weitzman models a flow pollutant, but greenhouse gases are persistent. The present paper derives the ranking criterion for stock pollutants. Innovations’ persistence and their gradual diffusion both favor the use of cap and trade. Numerical results show that the case for cap and trade as a means of reducing greenhouse gas emissions is stronger than widely believed.
Full Abstract |
|
|
1.6
SolACE - Solar Geoengineering in an Analytic Climate Economy. With Felix Meier. |
|
Short:
We discuss optimal and strategic sulfur-based geoengeneering in a quantitative analytic integrated assessment model of climate change. In the strategic setting, two active regions play a dynanmic game targeting different temperatures based on heterogenous characteristics.
(collapse) Full Abstract:
“Prices versus quantities” (Weitzman 1974), a hugely influential paper, is widely cited (and taught) in current debates about the best policy to reduce greenhouse gas emissions. The paper’s criterion for ranking policies suggests that technological uncertainty favors taxes over cap and trade. Weitzman models a flow pollutant, but greenhouse gases are persistent. The present paper derives the ranking criterion for stock pollutants. Innovations’ persistence and their gradual diffusion both favor the use of cap and trade. Numerical results show that the case for cap and trade as a means of reducing greenhouse gas emissions is stronger than widely believed.
Full Abstract |
|
Current projects with conference presentations: |
|
1.7
IAMs and CO2 Emissions – An Analytic Discussion |
|
Short:
The paper discusses the core drivers of carbon dioxide emissions in a variety of integrated assessment models of climate change (IAMs), including an almost exact analytic solution of DICE's emissions and a careful discussion of emissions in Golosov et al. (2014) and Traeger's (2018) more complex IAMs.
(collapse) Full Abstract:
The paper presents an analytic discussion of the core drivers of CO2 emissions in several integrated assessment models of climate change (IAMs). I derive an approximate analytic solution for emissions in the widespread DICE model (conditional on the SCC). I compare its emission dynamics to the model of Golosov et al. (2014), whose numeric emission simulation and results I analyzed in detail. Finally, I analyze emissions in the Analytic Climate Economy (ACE) model (Traeger 2018), which relies on a variety of energy sectors that rely on capital, labor, and primary energy sources whose substitutability can differ across sectors and over time.
Full Abstract |
|
|
1.8
Self-Enforcing Agreements. With Hiroaki Sakamoto. |
|
Short:
We suggest a new equilibrium concept for coalition-formation games with externalities and voluntary participation. It connects free-riding constraints with belief formation and ideas related to von Neumann-Morgenstern stability. Compared to much of the literature on international environmental agreeemnts, our concept predicts larger coalitions that are more sensitive to the number of players.
(collapse) Full Abstract:
We consider a coalition-formation game with externalities in which participation is voluntary and non-binding. We assume that players (countries) form beliefs over possible long-term outcomes of the game. These beliefs have to be consistent with common free-riding constraints as well as farsighted expectation formation relating to von Neumann-Morgenstern stability.
We obtain a simple equilibrium concept that permits a general characterization of the emerging coalitions. An application to examples in the literature on international environmental agreements predicts larger coalition sizes that grow with number of countries, contrasing sharply with the typical results in this literature that coalitions are small and independent of the number of players.
Full Abstract |
|
|
1.9
Pricing an Unknown Climate. With Svenn Jensen. |
|
Short:
Anthropogenic greenhouse gas emissions trigger many feedbacks with unknown warming implications. Given these uncertainties are insufficiently described by simple likelihoods, we integrate ambiguity and (rational) ambiguity aversion into DICE-based integrated assessment model of climate change to evaluate the implications of ambiguity for optimal climate policy.
(collapse) Full Abstract:
Anthropogenic greenhouse gas emissions are changing the energy balance of our planet. A multitude of climatic feedbacks make the resulting surface warming over the next decades and centuries highly uncertain. The likelihood of vastly differing global warming scenarios is not reliably quantifiable. Decision theory distinguishes between known, quantifiable risks and situations of deep uncertainty, or ambiguity. A fully rational decision maker can respond differently to ambiguity and to risk, and real-world decision makers frequently do. We show how aversion to ambiguity affects optimal climate policy in an integrated assessment of climate change. We derive an analytic social cost of carbon formula for an ambiguity averse decision maker in a generic integrated assessment model. We quantify the impact of smooth ambiguity aversion for a stochastic dynamic programming implementation of DICE with ambiguity under different damage assumptions.
Full Abstract |
|
|