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Going beyond tradition:Growth and Mitigation Policies with Uncertain Climate Damage

Lucas Bretschger and Alexandra Vinogradova Vinogradova ()
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Alexandra Vinogradova Vinogradova: ETH Zurich, Switzerland

No 14/202, CER-ETH Economics working paper series from CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich

Abstract: Climate physics predicts that the intensity of natural disasters will increase in the future due to climate change. One of the biggest challenges for economic modeling is the inherent uncertainty of climate events, which crucially affects consumption, investment, and abatement decisions. We present a stochastic model of a growing economy where natural disasters are multiple and random, with damages driven by the economy's polluting activity. We provide a closed-form solution and show that the optimal path is characterized by a constant growth rate of consumption and the capital stock until a shock arrives, triggering a downward jump in both variables. Optimum mitigation policy consists of spending a constant fraction of output on emissions abatement. This fraction is an increasing function of the arrival rate, polluting intensity of output, and the damage intensity of emissions. A sharp response of the optimum growth rate and the abatement share to changes in the arrival rate and the damage intensity justifies more stringent climate policies as compared to the expectation-based scenario. We subsequently extend the baseline model by adding climate-induced fluctuations around the growth trend and stock-pollution effects, demonstrating robustness of our results. In a quantitative assessment of our model we show that the optimal abatement expenditure at the global level may represent 0.9% of output, which is equivalent to a tax of $71 per ton carbon.

Keywords: Climate policy; uncertainty; natural disasters; endogenous growth. (search for similar items in EconPapers)
JEL-codes: O10 Q52 Q54 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2014-08
New Economics Papers: this item is included in nep-dge, nep-ene, nep-env, nep-gro and nep-res
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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