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Implications of a lowered damage trajectory for mitigation in a continuous-time stochastic model

  • Strand, Jon

This paper provides counterexamples to the idea that mitigation of greenhouse gases causing climate change, and adaptation to climate change, are always and everywhere substitutes. The author considers optimal policy for mitigating greenhouse gas emissions when climate damages follow a geometric Brownian motion process with positive drift, and the trajectory for damages can be down-shifted by adaptive activities, focusing on two main cases: 1) damages are reduced proportionately by adaptation for any given climate impact ("reactive adaptation"); and 2) the growth path for climate damages is down-shifted ("anticipatory adaptation"). In this model mitigation is a lumpy one-off decision. Policy to reduce damages for given emissions is continuous in case 1, but may be lumpy in case 2, and reduces both expectation and variance of damages. Lower expected damages promote mitigation, and reduced variance discourages it (as the option value of waiting is reduced). In case 1, the last effect may dominate. Mitigation then increases when damages are dampened: mitigation and adaptation are complements. In case 2, mitigation and adaptation are always substitutes.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5724.

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Date of creation: 01 Jun 2011
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Handle: RePEc:wbk:wbrwps:5724
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  1. Richard S.J. Tol, 2002. "Emission Abatement Versus Development As Strategies To Reduce Vulnerability To Climate Change: An Application Of Fund," Working Papers FNU-12, Research unit Sustainability and Global Change, Hamburg University, revised Apr 2002.
  2. Geoffrey Heal & Bengt Kriström, 2002. "Uncertainty and Climate Change," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 22(1), pages 3-39, June.
  3. Framstad, Nils Chr. & Strand, Jon, 2013. "Energy Intensive Infrastructure Investments with Retrofits in Continuous Time: Effects of Uncertainty on Energy Use and Carbon Emissions," Memorandum 11/2013, Oslo University, Department of Economics.
  4. Hallegatte, Stephane & Lecocq, Franck & de Perthuis, Christian, 2011. "Designing climate change adaptation policies : an economic framework," Policy Research Working Paper Series 5568, The World Bank.
  5. Fankhauser, Samuel & Smith, Joel B. & Tol, Richard S. J., 1999. "Weathering climate change: some simple rules to guide adaptation decisions," Ecological Economics, Elsevier, vol. 30(1), pages 67-78, July.
  6. Pindyck, Robert S., 2002. "Optimal timing problems in environmental economics," Journal of Economic Dynamics and Control, Elsevier, vol. 26(9-10), pages 1677-1697, August.
  7. Richard Tol, 2007. "The double trade-off between adaptation and mitigation for sea level rise: an application of FUND," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 12(5), pages 741-753, June.
  8. Pindyck, Robert S., 2000. "Irreversibilities and the timing of environmental policy," Resource and Energy Economics, Elsevier, vol. 22(3), pages 233-259, July.
  9. Framstad, N.C., 2011. "A remark on R.S. Pindyck: "Irreversibilities and the timing of environmental policy"," Resource and Energy Economics, Elsevier, vol. 33(3), pages 756-760, September.
  10. Fisher, Anthony C., 2000. "Investment under uncertainty and option value in environmental economics," Resource and Energy Economics, Elsevier, vol. 22(3), pages 197-204, July.
  11. Balikcioglu, Metin & Fackler, Paul L. & Pindyck, Robert S., 2011. "Solving optimal timing problems in environmental economics," Resource and Energy Economics, Elsevier, vol. 33(3), pages 761-768, September.
  12. Lecocq, Franck & Shalizi, Zmarak, 2007. "Balancing expenditures on mitigation of and adaptation to climate change : an exploration of Issues relevant to developing countries," Policy Research Working Paper Series 4299, The World Bank.
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