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Watch Your Step: Optimal Policy in a Tipping Climate

  • Derek Lemoine
  • Christian Traeger

We investigate the optimal policy response to the possibility of abrupt, irreversible shifts in system dynamics. The welfare cost of a tipping point emerges from the policymaker's response to altered system dynamics. Our policymaker also learns about a threshold's location by observing the system's response in each period. Simulations with a recursive, numerical climate-economy model show that tipping possibilities raise the optimal carbon tax more strongly over time. The resulting policy paths ultimately lower optimal peak warming by up to 0.5°C. Different types of posttipping shifts in dynamics generate qualitatively different optimal pretipping policy paths.

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Article provided by American Economic Association in its journal American Economic Journal: Economic Policy.

Volume (Year): 6 (2014)
Issue (Month): 1 (February)
Pages: 137-66

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Handle: RePEc:aea:aejpol:v:6:y:2014:i:1:p:137-66
Note: DOI: 10.1257/pol.6.1.137
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