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Growth and Mitigation Policies with Uncertain Climate Damage

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  • Lucas Bretschger
  • Alexandra Vinogradova

Abstract

We analyze an endogenously growing economy in which production generates greenhouse gas emissions leading to global temperature increase. Global warming causes stochastic climate shocks, modeled by the Poisson process, which destroy part of the economy's capital stock. Part of the output may be devoted to emissions abatement and thus damages from climate shocks may be reduced. We solve the model in closed form and show that the optimal path is characterized by a constant growth rate of consumption and capital stock until a shock arrives, triggering a downward jump in both variables. The magnitude of the jump depends on the Poisson arrival rate, abatement efficiency, damage intensity, and the elasticity of intertemporal consumption substitution. Optimum mitigation policy consists of spending a constant share of output on abatement, which is an increasing function of the Poisson arrival rate, the economy's productivity, polluting intensity of output, and the intensity of environmental damage. Optimum growth and abatement react sharply to changes in the arrival rate and the damage intensity, suggesting more stringent climate policies for a realistic world with uncertainty compared to the certainty-equivalent case. We extend the baseline model by adding climate-induced fluctuations around the growth trend and stock pollution effects, showing the robustness of our results.

Suggested Citation

  • Lucas Bretschger & Alexandra Vinogradova, 2014. "Growth and Mitigation Policies with Uncertain Climate Damage," CEEES Paper Series CE3S-02/14, European University at St. Petersburg, Department of Economics.
  • Handle: RePEc:eus:ce3swp:0214
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Müller-Fürstenberger, Georg & Schumacher, Ingmar, 2015. "Insurance and climate-driven extreme events," Journal of Economic Dynamics and Control, Elsevier, vol. 54(C), pages 59-73.
    2. Jean-Marc Bourgeon & Margot Hovsepian, 2017. "Green Technology Adoption and the Business Cycle," CESifo Working Paper Series 6485, CESifo Group Munich.
    3. Marc Chesney & Pierre Lasserre & Bruno Troja, 2017. "Mitigating global warming: a real options approach," Annals of Operations Research, Springer, vol. 255(1), pages 465-506, August.
    4. Lucas Bretschger & Alexandra Vinogradova, 2015. "Equitable and effective climate policy: Integrating less developed countries into a global climate agreement," International Economics and Economic Policy, Springer, vol. 12(4), pages 437-467, October.
    5. Can Askan Mavi, 2017. "Creative Destruction vs Destructive Destruction ? : A Schumpeterian Approach for Adaptation and Mitigation," Working Papers halshs-01455297, HAL.
    6. Lucas Bretschger, 2018. "Greening Economy, Graying Society," CER-ETH Press, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich, edition 2, number 18-001, June.

    More about this item

    Keywords

    climate policy; uncertainty; natural disasters; endogenous growth;

    JEL classification:

    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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