Dark Clouds or Silver Linings? Knightian Uncertainty and Climate Change

Yu-Fu Chen, Michael Funke and Nicole Glanemann

No 258, Dundee Discussion Papers in Economics from Economic Studies, University of Dundee

Abstract: This paper examines the impact of Knightian uncertainty upon optimal climate policy through the prism of a continuous-time real option modelling framework. We analytically determine optimal intertemporal climate policies under ambiguous assessments of climate damages. Additionally, numerical simulations are provided to illustrate the properties of the model. The results indicate that increasing Knightian uncertainty accelerates climate policy, i.e. policy makers become more reluctant to postpone the timing of climate policies into the future.

Keywords: Climate change; Knightian uncertainty; kappa-ambiguity; real options (search for similar items in EconPapers)
JEL-codes: C61 D81 Q54 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene and nep-env
Date: 2011-08
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Related works:
Working Paper: Dark Clouds or Silver Linings? Knightian Uncertainty and Climate Change (2011)
Working Paper: Dark Clouds or Silver Linings? Knightian Uncertainty and Climate Change (2011)
Working Paper: Dark Clouds or Silver Linings? Knightian Uncertainty and Climate Change (2011)
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Persistent link: http://EconPapers.repec.org/RePEc:dun:dpaper:258

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