Growth and Mitigation Policies with Uncertain Climate Damage

Lucas Bretschger and Alexandra Vinogradova

No CE3S-02/14, CEEES Paper Series from European University at St. Petersburg, Department of Economics

Abstract: We analyze an endogenously growing economy in which production generates greenhouse gas emissions leading to global temperature increase. Global warming causes stochastic climate shocks, modeled by the Poisson process, which destroy part of the economy's capital stock. Part of the output may be devoted to emissions abatement and thus damages from climate shocks may be reduced. We solve the model in closed form and show that the optimal path is characterized by a constant growth rate of consumption and capital stock until a shock arrives, triggering a downward jump in both variables. The magnitude of the jump depends on the Poisson arrival rate, abatement efficiency, damage intensity, and the elasticity of intertemporal consumption substitution. Optimum mitigation policy consists of spending a constant share of output on abatement, which is an increasing function of the Poisson arrival rate, the economy's productivity, polluting intensity of output, and the intensity of environmental damage. Optimum growth and abatement react sharply to changes in the arrival rate and the damage intensity, suggesting more stringent climate policies for a realistic world with uncertainty compared to the certainty-equivalent case. We extend the baseline model by adding climate-induced fluctuations around the growth trend and stock pollution effects, showing the robustness of our results.

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: 41 pages
Date: 2014-05-28
New Economics Papers: this item is included in nep-dge, nep-ene, nep-env and nep-gro
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Related works:
Working Paper: Growth and Mitigation Policies with Uncertain Climate Damage (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eus:ce3swp:0214

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