Risk and aversion in the integrated assessment of climate change
AbstractWe analyze the impact of damage uncertainty on optimal mitigation policies in the integrated assessment of climate change. Usually, these models analyzeuncertainty by averaging deterministic paths. In contrast, we build a consistentmodel deriving optimal policy rules under persistent uncertainty. For this purpose,we construct a close relative of the DICE model in a recursive dynamic programming framework. Our recursive approach allows us to disentangle effects of risk, risk aversion, and aversion to intertemporal substitution. We analyze different ways how damage uncertainty can affect the DICE equations. We compare the optimal policies to those resulting from the wide-spread ex-ante uncertainty approach averaging deterministic paths.
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Bibliographic InfoPaper provided by Department of Agricultural & Resource Economics, UC Berkeley in its series Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series with number qt1562s275.
Date of creation: 01 Nov 2011
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climate change; uncertainty; integrated assessment; risk aversion; intertemporal substitution; recursive utility; dynamic programming; Social and Behavioral Sciences; Life Sciences;
Other versions of this item:
- Crost, Benjamin & Traeger, Christian P., 2010. "Risk and aversion in the integrated assessment of climate change," CUDARE Working Paper Series 1104R, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy, revised Jul 2011.
- NEP-AGR-2012-03-28 (Agricultural Economics)
- NEP-ALL-2012-03-28 (All new papers)
- NEP-ENE-2012-03-28 (Energy Economics)
- NEP-ENV-2012-03-28 (Environmental Economics)
- NEP-UPT-2012-03-28 (Utility Models & Prospect Theory)
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