1.1 Uncertainty in the Analytic Climate Economy.
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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.
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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.
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1.2
Pricing Climate Risk. With Svenn Jensen. |
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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.
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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.
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1.3
SolACE - Solar Geoengineering in an Analytic Climate Economy. With Felix Meier. |
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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.
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“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.
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1.4 Uncertain Remedies to Fight Uncertain Consequences: The Case of Solar Geoengineering.
With Felix Meier. |
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Solar geoengineering can counteract the warming caused by greenhouse gas emissions. Deterministic integrated assessment models show major net benefits from solar geoengineering, but are highly sensitive to the assumed damages from and effectiveness of solar geoengineering. We analyze how uncertainties and the anticipation of learning affect opimtal mitigation and geoengineering polies.
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Solar geoengineering can cool our planet and counteract the warming caused by greenhouse gas emissions. Given current emission trajectories, solar geoengineering has the potential to save lives, reduce severe impacts on economic production, and save ecosystems and island states. Deterministic integrated assessment models tend to show major benefits from solar geoengineering, but are highly sensitive to the assumed and highly uncertain damages from solar geoengineering as well as the effectiveness of cooling the planet. We analyze how uncertainties and the anticipation of learning change the case for solar geoengineering in a world with an uncertain temperature response to carbon dioxide emissions.
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1.5
The Macroeconomics of Clean Energy Subsidies. With Greg Casey and Woongchan Jeon. |
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The paper analyzes whether clean energy subsidies can make up for a lack of Pigovian taxation in a quantitative climate-economy model. We show that, at common parameter values, clean energy subsidies can increase fossil use and explain the roles of the substitubility between clean and fossil energy and of the price elasticity of demand for energy services.
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We study the impacts of clean energy subsidies in a quantitative climate-economy model. We highlight two factors that determine the effectiveness of these second-best policies: (i) the elasticity of substitution between clean and dirty energy and (ii) the price elasticity of demand for energy services. At standard parameter values, subsidies for clean energy increase emissions and decrease welfare relative to laissez faire. With greater substitutability between clean and dirty energy, the subsidies in the Inflation Reduction Act generate modest emissions reductions and welfare gains. Even in this more optimistic scenario, the constrained-efficient subsidy generates large losses relative to a carbon tax.
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Current projects with drafts available on conference websites and upon request: |
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1.6
IAMs and CO2 Emissions – An Analytic Discussion |
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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.
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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.
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1.7
Self-Enforcing Agreements. With Hiroaki Sakamoto. |
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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.
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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.
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1.8
Pricing an Unknown Climate. With Svenn Jensen. |
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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.
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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.
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1.9
Carbon dioxide removal in an analytic global climate economy. With Felix Meier, Wilfried Rickels, and Martin Quaas. |
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Net-zero climate policies rely on carbon dioxide removal (CDR) from the atmosphere. We analyze CDR technologies
in an analytic global integrated assessment model of climate change and show that the availability of CDR has only a minor impact on optimal carbon pricing.
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Net-zero climate policies foresee deployment of atmospheric carbon
dioxide removal with geological, terrestrial, or marine carbon storage. To study the
effects of carbon dioxide removal (CDR) on the global economy and climate change
mititgation efforts, we compare the global climate economy with CDR technologies
available to a global climate economy without CDR. We find that with CDR net
energy input and net emissions are lower over then entire time path. CDR affects
the Social Cost of Carbon (SCC) via changes in total economic output, but has no
direct effect on the analytic structure of the SCC. With CDR, the SCC is lower at the
beginning, and higher in later years; carbon dioxide emissions are first higher and then
lower. The paper provides the basis for the analysis of decentralized and potentially
non-cooperative CDR policies.
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1.10
The Green Transition: Non-convexities and the Need for the Big Push. With Laurens Walleghem and Niko Jaakkola. |
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Representing feedback effects that reflect synergies and network effects we show show how combinations of taxes and subsidies are required to push the economy from fossil intensive to mostly renewable. We discuss the role of firms’ beliefs over the transition in order to move between clean and fossil intensive steady states.
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We build a model of the green transition involving feedback effects that reflect synergies and network effects. We show that the model gives rise to several steady states and discuss how combinations of taxes and subsidies are required to push the economy from fossil intensive to mostly renewable. We discuss that firms’ beliefs over the transition can play an important role for the transition path (or whether we transition at all) and discuss second-best policies when policy makers are constrained in their ability to raise taxes.
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