Watch Your Step: Optimal Policy in a Tipping Climate

Derek Lemoine and Christian Traeger

American Economic Journal: Economic Policy, 2014, vol. 6, issue 1, 137-66

Abstract: We investigate the optimal policy response to the possibility of abrupt, irreversible shifts in system dynamics. The welfare cost of a tipping point emerges from the policymaker's response to altered system dynamics. Our policymaker also learns about a threshold's location by observing the system's response in each period. Simulations with a recursive, numerical climate-economy model show that tipping possibilities raise the optimal carbon tax more strongly over time. The resulting policy paths ultimately lower optimal peak warming by up to 0.5°C. Different types of posttipping shifts in dynamics generate qualitatively different optimal pretipping policy paths.

JEL-codes: D78 H23 Q54 Q58 (search for similar items in EconPapers)
Date: 2014
Note: DOI: 10.1257/pol.6.1.137
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Citations: View citations in EconPapers (206)

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