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Regional IAM: analysis of risk-adjusted costs and benefits of climate policies

Author

Listed:
  • Alexander Golub
  • Oleg Lugovoy
  • Anil Markandya
  • Ramon Arigoni Ortiz
  • James Wang

Abstract

Across the full range of publications in the field of economics of climate change there is perhaps only one firm agreement: both costs and benefits of climate policy are highly uncertain. In an ideal world one would wait until a good deal of uncertainty is resolved and then make a final decision. Usually in the economic literature it would be interpreted as adopting a relatively weak policy now and adjusting it later. Unfortunately, in the context of path-dependency and irreversibility of climatic events there is no way to preserve a full flexibility for the future: near-term selection of an interim climate policy implies some irreversible consequences. Continued accumulation of GHG in the atmosphere makes some policy targets (expressed in temperature level or GHG ppm concentration) infeasible. The paper examines the application of real option analysis to calculate costs and benefits of an interim climate policy. In contrast to conventional CBA, the proposed methodology also accounts for lost and gained flexibility attributed to the adoption of an interim target.

Suggested Citation

  • Alexander Golub & Oleg Lugovoy & Anil Markandya & Ramon Arigoni Ortiz & James Wang, 2013. "Regional IAM: analysis of risk-adjusted costs and benefits of climate policies," Working Papers 2013-06, BC3.
  • Handle: RePEc:bcc:wpaper:2013-06
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    References listed on IDEAS

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    10. Ortiz, Ramon Arigoni & Golub, Alexander & Lugovoy, Oleg & Markandya, Anil & Wang, James, 2011. "DICER: A tool for analyzing climate policies," Energy Economics, Elsevier, vol. 33(S1), pages 41-49.
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    12. Ramon Arigoni Ortiz & Alexander Golub & Oleg Lugovoy & Anil Markandya & James Wang, 2010. "The DICER Model: Methodological Issues and Initial Results," Working Papers 2010-11, BC3.
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    Keywords

    Climate policy; integrated impact assessment model; uncertainty; real option analysis;

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