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The Climate Change Learning Curve

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Abstract

The key element in the tension between those who believe climate change is an issue and those who do not is essentially the question of whether we are merely in a long period of shock-induced above average temperatures or if we have led to this increase in temperatures by anthropogenic carbon emissions. The model proposed in this paper allows for a model in which we weigh observations on temperature against the potential that these are generated by a combination of uncertain parameters; namely the coefficient of autoregression and the sensitivity of temperature change to atmospheric carbon levels. This paper shows that, contrary to predictions in the literature that we can resolve uncertainty very quickly, the time to learn may be on the order of thousands of years when uncertainty surrounds two parameters in the law of motion for temperature. When the learning model is embedded in an optimal policy growth model, policy decisions are found to be affected by the prior mean but not the variance. A new solution algorithm which relies on randomization and least squares approximation is applied to solve the value function in the model.

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Paper provided by HEC Montréal, Institut d'économie appliquée in its series Cahiers de recherche with number 04-03.

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Length: 27 pages
Date of creation: Apr 2004
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Handle: RePEc:iea:carech:0403

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Postal: Institut d'économie appliquée HEC Montréal 3000, Chemin de la Côte-Sainte-Catherine Montréal, Québec H3T 2A7
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Related research

Keywords: Climate Change; Bayesian Learning; Environmental Regulation; Growth; Pollution; Dynamic Programming; Precautionary Principle.;

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References

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  1. Kelly, David L. & Kolstad, Charles D., 1999. "Bayesian learning, growth, and pollution," Journal of Economic Dynamics and Control, Elsevier, vol. 23(4), pages 491-518, February.
  2. Epstein, Larry G, 1980. "Decision Making and the Temporal Resolution of Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(2), pages 269-83, June.
  3. Pizer, William A., 1999. "The optimal choice of climate change policy in the presence of uncertainty," Resource and Energy Economics, Elsevier, vol. 21(3-4), pages 255-287, August.
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  5. Keane, Michael P & Wolpin, Kenneth I, 1994. "The Solution and Estimation of Discrete Choice Dynamic Programming Models by Simulation and Interpolation: Monte Carlo Evidence," The Review of Economics and Statistics, MIT Press, vol. 76(4), pages 648-72, November.
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  8. Maddison, David, 1995. "A cost-benefit analysis of slowing climate change," Energy Policy, Elsevier, vol. 23(4-5), pages 337-346.
  9. Gollier, Christian & Jullien, Bruno & Treich, Nicolas, 2000. "Scientific progress and irreversibility: an economic interpretation of the 'Precautionary Principle'," Journal of Public Economics, Elsevier, vol. 75(2), pages 229-253, February.
  10. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, December.
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  12. Reiter, Michael, 1999. "Solving higher-dimensional continuous-time stochastic control problems by value function regression," Journal of Economic Dynamics and Control, Elsevier, vol. 23(9-10), pages 1329-1353, September.
  13. Kolstad, Charles D. & Kelly, David L. & Mitchell, Glenn, 1999. "Adjustment Costs from Environmental Change Induced by Incomplete Information and Learning," University of California at Santa Barbara, Economics Working Paper Series qt9mx119gc, Department of Economics, UC Santa Barbara.
  14. Karp, Larry & Zhang, Jiangfeng, 2006. "Regulation with anticipated learning about environmental damages," Journal of Environmental Economics and Management, Elsevier, vol. 51(3), pages 259-279, May.
  15. Alan Manne & Richard Richels, 1992. "Buying Greenhouse Insurance: The Economic Costs of CO2 Emission Limits," MIT Press Books, The MIT Press, edition 1, volume 1, number 026213280x, December.
  16. repec:fth:calaec:10-99 is not listed on IDEAS
  17. Kolstad, Charles D., 1996. "Learning and Stock Effects in Environmental Regulation: The Case of Greenhouse Gas Emissions," Journal of Environmental Economics and Management, Elsevier, vol. 31(1), pages 1-18, July.
  18. Cyert, Richard M & DeGroot, Morris H, 1974. "Rational Expectations and Bayesian Analysis," Journal of Political Economy, University of Chicago Press, vol. 82(3), pages 521-36, May/June.
  19. 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.
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