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Robust Control in Global Warming Management: An Analytical Dynamic Integrated Assessment

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  • Hennlock, Magnus

    ()
    (Department of Economics, School of Business, Economics and Law, Göteborg University)

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    Abstract

    Knightian uncertainty in climate sensitivity is analyzed in a two sectoral integrated assessment model (IAM), based on an extension of DICE. A representative household that expresses ambiguity aversion uses robust control to identify robust climate policy feedback rules that work well over IPCC climate-sensitivity uncertainty range [1]. Ambiguity aversion, together with linear damage, increases carbon cost in a similar way as a low pure rate of time preference. Secondly, in combination with non-linear damage it makes policy responsive to changes in climate data observations as it makes the household concerned about misreading sudden increases in carbon concentration rate and temperature as sources to global warming. Perfect ambiguity aversion results in an infinite expected shadow carbon cost and a zero carbon-intensive consumption path. Dynamic programming identifies an analytically tractable solution to the model.

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    File URL: http://hdl.handle.net/2077/20081
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    Bibliographic Info

    Paper provided by University of Gothenburg, Department of Economics in its series Working Papers in Economics with number 354.

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    Length: 31 pages
    Date of creation: 17 Apr 2009
    Date of revision:
    Handle: RePEc:hhs:gunwpe:0354

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    Postal: Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden
    Phone: 031-773 10 00
    Web page: http://www.handels.gu.se/econ/
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    Related research

    Keywords: robust control; climate change policy; carbon cost; Knightian uncertainty; ambiguity aversion; integrated assessment models;

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    References

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    1. David Schmeidler, 1989. "Subjective Probability and Expected Utility without Additivity," Levine's Working Paper Archive 7662, David K. Levine.
    2. William D. Nordhaus & David Popp, 1997. "What is the Value of Scientific Knowledge? An Application to Global Warming Using the PRICE Model," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 1-45.
    3. Catarina Roseta-Palma & Anastasios Xepapadeas, 2004. "Robust Control in Water Management," Journal of Risk and Uncertainty, Springer, vol. 29(1), pages 21-34, 07.
    4. Stefan Trautmann & Ferdinand Vieider & Peter Wakker, 2008. "Causes of ambiguity aversion: Known versus unknown preferences," Journal of Risk and Uncertainty, Springer, vol. 36(3), pages 225-243, June.
    5. William D. Nordhaus, 2006. "The "Stern Review" on the Economics of Climate Change," NBER Working Papers 12741, National Bureau of Economic Research, Inc.
    6. Chichilnisky, Graciela, 2000. "An axiomatic approach to choice under uncertainty with catastrophic risks," Resource and Energy Economics, Elsevier, vol. 22(3), pages 221-231, July.
    7. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
    8. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
    9. Ulph, Alistair & Ulph, David, 1997. "Global Warming, Irreversibility and Learning," Economic Journal, Royal Economic Society, vol. 107(442), pages 636-50, May.
    10. Fox, Craig R & Tversky, Amos, 1995. "Ambiguity Aversion and Comparative Ignorance," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 585-603, August.
    11. Thomas J. Sargent & LarsPeter Hansen, 2001. "Robust Control and Model Uncertainty," American Economic Review, American Economic Association, vol. 91(2), pages 60-66, May.
    12. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S71-102, October.
    13. Martin L. Weitzman, 2007. "A Review of the Stern Review on the Economics of Climate Change," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 703-724, September.
    14. Vardas, Giannis & XEPAPADEAS, Anastasios, 2008. "Model Uncertainty, Ambiguity and the Precautionary Principle: Implications for Biodiversity Management," MPRA Paper 10236, University Library of Munich, Germany.
    15. Michael Schauer, 1995. "Estimation of the greenhouse gas externality with uncertainty," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 5(1), pages 71-82, January.
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    Cited by:
    1. In Chang Hwang & Richard S.J. Tol & Marjan W. Hofkes, 2013. "Active Learning about Climate Change," Working Paper Series 6513, Department of Economics, University of Sussex.
    2. Hwang, In Chang & Reynes, Frederic & Tol, Richard, 2014. "The effect of learning on climate policy under fat-tailed uncertainty," MPRA Paper 53681, University Library of Munich, Germany.
    3. Hwang, In Chang, 2014. "A recursive method for solving a climate-economy model: value function iterations with logarithmic approximations," MPRA Paper 54782, University Library of Munich, Germany.
    4. Tol, Richard S.J., 2013. "Targets for global climate policy: An overview," Journal of Economic Dynamics and Control, Elsevier, vol. 37(5), pages 911-928.

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