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Optimal CO2 mitigation under damage risk valuation

Nature Climate Change volume 4, pages 631–636 (2014)Cite this article

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Abstract

The current generation has to set mitigation policy under uncertainty about the economic consequences of climate change. This uncertainty governs both the level of damages for a given level of warming, and the steepness of the increase in damage per warming degree. Our model of climate and the economy is a stochastic version of a model employed in assessing the US Social Cost of Carbon (DICE). We compute the optimal carbon taxes and CO2 abatement levels that maximize welfare from economic consumption over time under different risk states. In accordance with recent developments in finance, we separate preferences about time and risk to improve the model’s calibration of welfare to observed market interest. We show that introducing the modern asset pricing framework doubles optimal abatement and carbon taxation. Uncertainty over the level of damages at a given temperature increase can result in a slight increase of optimal emissions as compared to using expected damages. In contrast, uncertainty governing the steepness of the damage increase in temperature results in a substantially higher level of optimal mitigation.

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Figure 1: The optimal carbon tax in US$ per tonne of carbon and the abatement rate as a percentage of business-as-usual emissions (top, 100 years), as well as the CO2 emissions from fossil fuel use and the temperature trajectories (bottom, 200 years), for different uncertainty specifications and evaluation frameworks.

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Acknowledgements

We are grateful to L. Karp, S. Jensen, A. Butz, M. Hanemann, K. Smith, D. Lemoine, D. Farber and J. Harte, and for financial support by the Giannini Foundation.

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Authors and Affiliations

  1. Department of Economics, University of Colorado Denver, Campus Box 181, Denver, Colorado 80217-3364, USA

    Benjamin Crost

  2. Department of Agricultural & Resource Economics, 207 Giannini Hall #3310, University of California Berkeley, Berkeley, California 94720-3310, USA

    Christian P. Traeger

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  1. Benjamin Crost
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Contributions

C.P.T. developed the research question and model and wrote the paper. Both authors together designed the algorithms and the graphical output; C.P.T. assisted and B.C. took the lead in programming and running the model.

Corresponding author

Correspondence to Christian P. Traeger.

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The authors declare no competing financial interests.

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Crost, B., Traeger, C. Optimal CO2 mitigation under damage risk valuation. Nature Clim Change 4, 631–636 (2014). https://doi.org/10.1038/nclimate2249

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