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Choosing the optimal climate change policy in the presence of catastrophic risk

Author

Listed:
  • Bosello, Francesco
  • De Cian, Enrica
  • Ferranna, Licia

Abstract

This paper contributes to the normative literature on mitigation and adaptation by analyzing their optimal policy balance in the context of climate catastrophic risk. The investigation enriches an integrated assessment model introducing the endogenous link between the probability of experiencing a climate-change related catastrophic event, the temperature increase caused by GHG emissions, and ultimately abatement choices. Results indicate that the presence of catastrophic risk induces substantial mitigation effort even in a non-cooperative setting, where usually global cooperation on climate, and accordingly substantive emission reductions, do not succeed. The policy balance is realigned from adaptation toward more mitigation, and the responsiveness of mitigation to changes in adaptation decreases. Compared to a world without climate catastrophes, risk reduces the substitutability between adaptation and mitigation because only mitigation can influence the catastrophic probability. In this setting, our analysis also shows that adaptation funds and strategic unilateral commitments to adaptation are not the most efficient ways of buying emission reduction in less developed countries, though they could create some welfare gains and induce abatement in the recipient countries.

Suggested Citation

  • Bosello, Francesco & De Cian, Enrica & Ferranna, Licia, 2012. "Choosing the optimal climate change policy in the presence of catastrophic risk," EIB Working Papers 2012/03, European Investment Bank (EIB).
  • Handle: RePEc:zbw:eibwps:201203
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    File URL: https://www.econstor.eu/bitstream/10419/88104/1/772224994.pdf
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    References listed on IDEAS

    as
    1. Heike Auerswald & Kai A. Konrad & Marcel Thum, 2011. "Adaptation, Mitigation and Risk-Taking in Climate Policy," CESifo Working Paper Series 3320, CESifo Group Munich.
    2. Viscusi, W Kip & Aldy, Joseph E, 2003. "The Value of a Statistical Life: A Critical Review of Market Estimates throughout the World," Journal of Risk and Uncertainty, Springer, vol. 27(1), pages 5-76, August.
    3. Kenneth J. Arrow & Anthony C. Fisher, 1974. "Environmental Preservation, Uncertainty, and Irreversibility," The Quarterly Journal of Economics, Oxford University Press, vol. 88(2), pages 312-319.
    4. repec:reg:rpubli:282 is not listed on IDEAS
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    More about this item

    Keywords

    climate change; mitigation; adaptation; climate risk; integrated assessment;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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