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Regional IAM: analysis of risk-adjusted costs and benefits of climate policies

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  • Alexander Golub
  • Oleg Lugovoy
  • Anil Markandya
  • Ramon Arigoni Ortiz
  • James Wang

Abstract

Across the full range of publications in the field of economics of climate change there is perhaps only one firm agreement: both costs and benefits of climate policy are highly uncertain. In an ideal world one would wait until a good deal of uncertainty is resolved and then make a final decision. Usually in the economic literature it would be interpreted as adopting a relatively weak policy now and adjusting it later. Unfortunately, in the context of path-dependency and irreversibility of climatic events there is no way to preserve a full flexibility for the future: near-term selection of an interim climate policy implies some irreversible consequences. Continued accumulation of GHG in the atmosphere makes some policy targets (expressed in temperature level or GHG ppm concentration) infeasible. The paper examines the application of real option analysis to calculate costs and benefits of an interim climate policy. In contrast to conventional CBA, the proposed methodology also accounts for lost and gained flexibility attributed to the adoption of an interim target.

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Bibliographic Info

Paper provided by BC3 in its series Working Papers with number 2013-06.

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Date of creation: Feb 2013
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Publication status: Published
Handle: RePEc:bcc:wpaper:2013-06

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Web page: http://www.bc3research.org/

Related research

Keywords: Climate policy; integrated impact assessment model; uncertainty; real option analysis;

This paper has been announced in the following NEP Reports:

References

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  1. Ramon Arigoni Ortiz & Alexander Golub & Oleg Lugovoy & Anil Markandya & James Wang, 2010. "The DICER Model: Methodological Issues and Initial Results," Working Papers 2010-11, BC3.
  2. David Popp, 2006. "Comparison of Climate Policies in the ENTICE-BR Model," The Energy Journal, International Association for Energy Economics, vol. 0(Special I), pages 163-174.
  3. Renaud Crassous, Jean-Charles Hourcade, Olivier Sassi, 2006. "Endogenous Structural Change and Climate Targets Modeling Experiments with Imaclim-R," The Energy Journal, International Association for Energy Economics, vol. 0(Special I), pages 259-276.
  4. Ortiz, Ramon Arigoni & Golub, Alexander & Lugovoy, Oleg & Markandya, Anil & Wang, James, 2011. "DICER: A tool for analyzing climate policies," Energy Economics, Elsevier, vol. 33(S1), pages S41-S49.
  5. Kai Lessmann & Ottmar Edenhofer & Nico Bauer, 2005. "Mitigation Strategies and Costs of Climate Protection: The effects of ETC in the hybrid Model MIND," Working Papers 2005.150, Fondazione Eni Enrico Mattei.
  6. Fredrik Hedenus, Christian Azar and Kristian Lindgren, 2006. "Induced Technological Change in a Limited Foresight Optimization Model," The Energy Journal, International Association for Energy Economics, vol. 0(Special I), pages 109-122.
  7. Toshihiko Masui, Tatsuya Hanaoka, Saeko Hikita, and Mikiko Kainuma, 2006. "Assessment of CO2 Reductions and Economic Impacts Considering Energy-Saving Investments," The Energy Journal, International Association for Energy Economics, vol. 0(Special I), pages 175-190.
  8. Tol, Richard S. J., 1996. "The damage costs of climate change towards a dynamic representation," Ecological Economics, Elsevier, vol. 19(1), pages 67-90, October.
  9. Anda, Jon & Golub, Alexander & Strukova, Elena, 2009. "Economics of climate change under uncertainty: Benefits of flexibility," Energy Policy, Elsevier, vol. 37(4), pages 1345-1355, April.
  10. Manne, Alan & Mendelsohn, Robert & Richels, Richard, 1995. "MERGE : A model for evaluating regional and global effects of GHG reduction policies," Energy Policy, Elsevier, vol. 23(1), pages 17-34, January.
  11. Nordhaus, William D & Yang, Zili, 1996. "A Regional Dynamic General-Equilibrium Model of Alternative Climate-Change Strategies," American Economic Review, American Economic Association, vol. 86(4), pages 741-65, September.
  12. Dowlatabadi, Hadi, 1998. "Sensitivity of climate change mitigation estimates to assumptions about technical change," Energy Economics, Elsevier, vol. 20(5-6), pages 473-493, December.
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