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Closed-Form Integrated Assessment and Uncertainty

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  • Christian Traeger

Abstract

The paper derives the optimal carbon tax in closed-form from an integrated assessment of climate change. The formula shows how carbon, temperature, and economic dynamics quantify the optimal mitigation effort. The model’s descriptive power is comparable to numeric models used in policy advising. Uncertainty surrounding climate change remains large, and the paper derives closed-form expressions of welfare loss from shocks and epistemological uncertainty. These expressions interact (intrinsic) risk attitude, distributional moments, and the climatic shadow values, and exhibit different sensitivities to time preference. Welfare gains from reducing uncertainty about temperature feedbacks are much higher than the gains from better measurements of carbon flows.

Suggested Citation

  • Christian Traeger, 2015. "Closed-Form Integrated Assessment and Uncertainty," CESifo Working Paper Series 5464, CESifo.
    • Handle: RePEc:ces:ceswps:_5464
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    File URL: https://www.cesifo.org/DocDL/cesifo1_wp5464.pdf
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    References listed on IDEAS

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    7. Reyer Gerlagh, 2012. "Carbon Prices for the Next Thousand Years," Review of Environment, Energy and Economics - Re3, Fondazione Eni Enrico Mattei, August.
    8. Jensen, Svenn & Traeger, Christian P., 2014. "Optimal climate change mitigation under long-term growth uncertainty: Stochastic integrated assessment and analytic findings," European Economic Review, Elsevier, vol. 69(C), pages 104-125.
    9. Reyer Gerlagh & Matti Liski, 2014. "Carbon Prices for the Next Hundred Years," CESifo Working Paper Series 4671, CESifo.
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    11. Iverson, Terrence, 2012. "Optimal Carbon Taxes with Non-Constant Time Preference," MPRA Paper 43264, University Library of Munich, Germany.
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    Cited by:

    1. Hiroaki Sakamoto & Masako Ikefuji & Jan R. Magnus, 2020. "Adaptation for Mitigation," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 75(3), pages 457-484, March.
    2. Hess, Joshua H. & Manning, Dale T. & Iverson, Terry & Cutler, Harvey, 2019. "Uncertainty, learning, and local opposition to hydraulic fracturing," Resource and Energy Economics, Elsevier, vol. 55(C), pages 102-123.
    3. Quaas, Martin F. & Bröcker, Johannes, 2016. "Substitutability and the social cost of carbon in a solvable growth model with irreversible climate change," Economics Working Papers 2016-09, Christian-Albrechts-University of Kiel, Department of Economics.

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    More about this item

    Keywords

    climate change; integrated assessment; uncertainty; learning; risk aversion; recursive utility; social cost of carbon; carbon tax; carbon cycle; climate sensitivity;
    All these keywords.

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis

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