Uncertainty in the Analytic Climate Economy

Christian Traeger

No 16065, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The paper analyzes optimal climate policy under uncertainty. It endows a recent quantitative analytic integrated assessment model (IAM) with long-run risk, adapting methods from the asset pricing literature to deal with endogenous climate risk. The model solves in closed-form for general degrees of risk aversion, stochastic climate feedbacks, and a stochastic damage-adaptation process. The model permits an exact solution of the infinite horizon stochastic fixed-point problem of a complex IAM. The approach facilitates new quantitative evidence for the role of uncertainty as well as analytic insights into the drivers and sensitivities of the optimal carbon tax facing an uncertain future.

Keywords: Climate change; Integrated assessment; Uncertainty; Risk aversion; Social cost of carbon; Damages; Adaptation; Long-run risk; Endogenous risk; stochastic volatility (search for similar items in EconPapers)
JEL-codes: D61 D80 E13 H23 H43 Q54 (search for similar items in EconPapers)
Date: 2021-04
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