IDEAS home Printed from https://ideas.repec.org/a/spr/climat/v127y2014i2p153-167.html
   My bibliography  Save this article

Hedging the climate sensitivity risks of a temperature target

Author

Listed:
  • Tommi Ekholm

Abstract

This paper addresses the problem of meeting a predetermined temperature target cost-effectively under uncertainty and gradual learning on climate sensitivity. The firstorder optimality conditions to a stochastic cost-minimization problem with a temperature constraint are first provided, portraying how marginal costs evolve with an optimal hedging strategy. Then, numerical stochastic scenarios with cost curves fitted to recent climate changemitigation scenarios are presented, illustrating both the range of possible future pathways and the effect of uncertainty to the solution. Last, the effect of several different sets of assumptions on the optimal hedging strategy are analyzed. The results highlight that the hedging of climate sensitivity risk calls for deeper early reductions, although the possibility of different assumptions prevents providing accurate policy guidance. Copyright Springer Science+Business Media Dordrecht 2014

Suggested Citation

  • Tommi Ekholm, 2014. "Hedging the climate sensitivity risks of a temperature target," Climatic Change, Springer, vol. 127(2), pages 153-167, November.
    • Handle: RePEc:spr:climat:v:127:y:2014:i:2:p:153-167
    DOI: 10.1007/s10584-014-1243-8
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s10584-014-1243-8
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s10584-014-1243-8?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. 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.
    2. Nordhaus, William D, 1991. "To Slow or Not to Slow: The Economics of the Greenhouse Effect," Economic Journal, Royal Economic Society, vol. 101(407), pages 920-937, July.
    3. Martin L. Weitzman, 1974. "Prices vs. Quantities," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 41(4), pages 477-491.
    4. Ekholm, Tommi & Soimakallio, Sampo & Moltmann, Sara & Höhne, Niklas & Syri, Sanna & Savolainen, Ilkka, 2010. "Effort sharing in ambitious, global climate change mitigation scenarios," Energy Policy, Elsevier, vol. 38(4), pages 1797-1810, April.
    5. Azar, Christian & Sterner, Thomas, 1996. "Discounting and distributional considerations in the context of global warming," Ecological Economics, Elsevier, vol. 19(2), pages 169-184, November.
    6. Manne, Alan S. & Stephan, Gunter, 1999. "Climate-change policies and international rate-of-return differentials," Energy Policy, Elsevier, vol. 27(6), pages 309-316, June.
    7. Martin L. Weitzman, 2001. "Gamma Discounting," American Economic Review, American Economic Association, vol. 91(1), pages 260-271, March.
    8. Manne, Alan S. & Richels, Richard G., 1991. "Buying greenhouse insurance," Energy Policy, Elsevier, vol. 19(6), pages 543-552.
    9. van Vuuren, Detlef P. & Stehfest, Elke & den Elzen, Michel G.J. & van Vliet, Jasper & Isaac, Morna, 2010. "Exploring IMAGE model scenarios that keep greenhouse gas radiative forcing below 3 W/m2 in 2100," Energy Economics, Elsevier, vol. 32(5), pages 1105-1120, September.
    10. Richard Loulou & Maryse Labriet, 2008. "ETSAP-TIAM: the TIMES integrated assessment model Part I: Model structure," Computational Management Science, Springer, vol. 5(1), pages 7-40, February.
    11. Martin L. Weitzman, 2009. "On Modeling and Interpreting the Economics of Catastrophic Climate Change," The Review of Economics and Statistics, MIT Press, vol. 91(1), pages 1-19, February.
    12. Ackerman, Frank & Stanton, Elizabeth A., 2012. "Climate risks and carbon prices: Revising the social cost of carbon," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 6, pages 1-25.
    13. Ackerman, Frank & Stanton, Elizabeth A. & Bueno, Ramón, 2010. "Fat tails, exponents, extreme uncertainty: Simulating catastrophe in DICE," Ecological Economics, Elsevier, vol. 69(8), pages 1657-1665, June.
    14. Richard S. J. Tol, 2009. "The Economic Effects of Climate Change," Journal of Economic Perspectives, American Economic Association, vol. 23(2), pages 29-51, Spring.
    15. Leach, Andrew J., 2007. "The climate change learning curve," Journal of Economic Dynamics and Control, Elsevier, vol. 31(5), pages 1728-1752, May.
    16. Richard Loulou, 2008. "ETSAP-TIAM: the TIMES integrated assessment model. part II: mathematical formulation," Computational Management Science, Springer, vol. 5(1), pages 41-66, February.
    17. Fuss, Sabine & Johansson, Daniel J.A. & Szolgayova, Jana & Obersteiner, Michael, 2009. "Impact of climate policy uncertainty on the adoption of electricity generating technologies," Energy Policy, Elsevier, vol. 37(2), pages 733-743, February.
    18. -, 2009. "The economics of climate change," Sede Subregional de la CEPAL para el Caribe (Estudios e Investigaciones) 38679, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    19. Calvin, Katherine & Clarke, Leon & Krey, Volker & Blanford, Geoffrey & Jiang, Kejun & Kainuma, Mikiko & Kriegler, Elmar & Luderer, Gunnar & Shukla, P.R., 2012. "The role of Asia in mitigating climate change: Results from the Asia modeling exercise," Energy Economics, Elsevier, vol. 34(S3), pages 251-260.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Tommi Ekholm & Hannele Korhonen, 2016. "Climate change mitigation strategy under an uncertain Solar Radiation Management possibility," Climatic Change, Springer, vol. 139(3), pages 503-515, December.
    2. Ekholm, Tommi, 2016. "Optimal forest rotation age under efficient climate change mitigation," Forest Policy and Economics, Elsevier, vol. 62(C), pages 62-68.
    3. Ekholm, Tommi, 2018. "Climatic Cost-benefit Analysis Under Uncertainty and Learning on Climate Sensitivity and Damages," Ecological Economics, Elsevier, vol. 154(C), pages 99-106.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ekholm, Tommi, 2018. "Climatic Cost-benefit Analysis Under Uncertainty and Learning on Climate Sensitivity and Damages," Ecological Economics, Elsevier, vol. 154(C), pages 99-106.
    2. 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.
    3. Richard S.J. Tol, 2021. "Estimates of the social cost of carbon have not changed over time," Working Paper Series 0821, Department of Economics, University of Sussex Business School.
    4. Richard S. J. Tol, 2021. "Estimates of the social cost of carbon have increased over time," Papers 2105.03656, arXiv.org, revised Aug 2022.
    5. Nordhaus, William, 2013. "Integrated Economic and Climate Modeling," Handbook of Computable General Equilibrium Modeling, in: Peter B. Dixon & Dale Jorgenson (ed.), Handbook of Computable General Equilibrium Modeling, edition 1, volume 1, chapter 0, pages 1069-1131, Elsevier.
    6. Nicholas Stern, 2013. "The Structure of Economic Modeling of the Potential Impacts of Climate Change: Grafting Gross Underestimation of Risk onto Already Narrow Science Models," Journal of Economic Literature, American Economic Association, vol. 51(3), pages 838-859, September.
    7. Tang, Bao-Jun & Wang, Xiang-Yu & Wei, Yi-Ming, 2019. "Quantities versus prices for best social welfare in carbon reduction: A literature review," Applied Energy, Elsevier, vol. 233, pages 554-564.
    8. Davidson, Marc D., 2014. "Zero discounting can compensate future generations for climate damage," Ecological Economics, Elsevier, vol. 105(C), pages 40-47.
    9. Joseph E. Aldy & Alan J. Krupnick & Richard G. Newell & Ian W. H. Parry & William A. Pizer, 2010. "Designing Climate Mitigation Policy," Journal of Economic Literature, American Economic Association, vol. 48(4), pages 903-934, December.
    10. Richard S J Tol, 2018. "The Economic Impacts of Climate Change," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 12(1), pages 4-25.
    11. Wonjun Chang & Thomas F. Rutherford, 2017. "Catastrophic Thresholds, Bayesian Learning And The Robustness Of Climate Policy Recommendations," Climate Change Economics (CCE), World Scientific Publishing Co. Pte. Ltd., vol. 8(04), pages 1-23, November.
    12. Mark Budolfson & Francis Dennig & Marc Fleurbaey & Asher Siebert & Robert H. Socolow, 2017. "The comparative importance for optimal climate policy of discounting, inequalities and catastrophes," Climatic Change, Springer, vol. 145(3), pages 481-494, December.
    13. van den Bergh, J.C.J.M. & Botzen, W.J.W., 2015. "Monetary valuation of the social cost of CO2 emissions: A critical survey," Ecological Economics, Elsevier, vol. 114(C), pages 33-46.
    14. Richard S. J. Tol & In Chang Hwang & Frédéric Reynès, 2012. "The Effect of Learning on Climate Policy under Fat-tailed Uncertainty," Working Paper Series 5312, Department of Economics, University of Sussex Business School.
    15. Stefano Giglio & Bryan Kelly & Johannes Stroebel, 2021. "Climate Finance," Annual Review of Financial Economics, Annual Reviews, vol. 13(1), pages 15-36, November.
    16. Pindyck, Robert S., 2012. "Uncertain outcomes and climate change policy," Journal of Environmental Economics and Management, Elsevier, vol. 63(3), pages 289-303.
    17. Dietz, Simon, 2012. "The treatment of risk and uncertainty in the US social cost of carbon for regulatory impact analysis," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 6, pages 1-12.
    18. Christian Gollier, 2019. "A Personal Biography of Marty Weitzman," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 74(3), pages 943-947, November.
    19. Simon Dietz, 2011. "The treatment of risk and uncertainty in the US Social Cost of Carbon for Regulatory Impact Analysis," GRI Working Papers 54, Grantham Research Institute on Climate Change and the Environment.
    20. Pezzey, John C.V. & Burke, Paul J., 2014. "Towards a more inclusive and precautionary indicator of global sustainability," Ecological Economics, Elsevier, vol. 106(C), pages 141-154.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:climat:v:127:y:2014:i:2:p:153-167. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.