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Implications of a lowered damage trajectory for mitigation in a continuous-time stochastic model

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  • Strand, Jon

Abstract

This paper provides counterexamples to the idea that mitigation of greenhouse gases causing climate change, and adaptation to climate change, are always and everywhere substitutes. The author considers optimal policy for mitigating greenhouse gas emissions when climate damages follow a geometric Brownian motion process with positive drift, and the trajectory for damages can be down-shifted by adaptive activities, focusing on two main cases: 1) damages are reduced proportionately by adaptation for any given climate impact ("reactive adaptation"); and 2) the growth path for climate damages is down-shifted ("anticipatory adaptation"). In this model mitigation is a lumpy one-off decision. Policy to reduce damages for given emissions is continuous in case 1, but may be lumpy in case 2, and reduces both expectation and variance of damages. Lower expected damages promote mitigation, and reduced variance discourages it (as the option value of waiting is reduced). In case 1, the last effect may dominate. Mitigation then increases when damages are dampened: mitigation and adaptation are complements. In case 2, mitigation and adaptation are always substitutes.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5724.

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Date of creation: 01 Jun 2011
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Handle: RePEc:wbk:wbrwps:5724

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Keywords: Climate Change Economics; Adaptation to Climate Change; Climate Change Mitigation and Green House Gases; Science of Climate Change; Climate Change Policy and Regulation;

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  1. Fankhauser, Samuel & Smith, Joel B. & Tol, Richard S. J., 1999. "Weathering climate change: some simple rules to guide adaptation decisions," Ecological Economics, Elsevier, Elsevier, vol. 30(1), pages 67-78, July.
  2. Pindyck, Robert S., 1998. "Irreversibilities and the timing of environmental policy," Working papers, Massachusetts Institute of Technology (MIT), Sloan School of Management WP 4047-98., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  3. Pindyck, Robert S., 2002. "Optimal timing problems in environmental economics," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 26(9-10), pages 1677-1697, August.
  4. Fisher, Anthony C., 2000. "Investment under uncertainty and option value in environmental economics," Resource and Energy Economics, Elsevier, Elsevier, vol. 22(3), pages 197-204, July.
  5. Geoffrey Heal & Bengt Kriström, 2002. "Uncertainty and Climate Change," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 22(1), pages 3-39, June.
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