Solving stochastic climate-economy models: A deep least-squares Monte Carlo approach

Aleksandar Arandjelovi\'c, Pavel V. Shevchenko, Tomoko Matsui, Daisuke Murakami and Tor A. Myrvoll

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Abstract: Stochastic versions of recursive integrated climate-economy assessment models are essential for studying and quantifying policy decisions under uncertainty. However, as the number of stochastic shocks increases, solving these models as dynamic programming problems using deterministic grid methods becomes computationally infeasible, and simulation-based methods are needed. The least-squares Monte Carlo (LSMC) method has become popular for solving optimal stochastic control problems in quantitative finance. In this paper, we extend the application of the LSMC method to stochastic climate-economy models. We exemplify this approach using a stochastic version of the DICE model with all five main uncertainties discussed in the literature. To address the complexity and high dimensionality of these models, we incorporate deep neural network approximations in place of standard regression techniques within the LSMC framework. Our results demonstrate that the deep LSMC method can be used to efficiently derive optimal policies for climate-economy models in the presence of uncertainty.

Date: 2024-08
New Economics Papers: this item is included in nep-big
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