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A Simple Framework for Climate-Change Policy under Model Uncertainty

Stergios Athanasoglou, Valentina Bosetti () and Laurent Drouet

No 2017.13, Working Papers from Fondazione Eni Enrico Mattei

Abstract: We propose a novel framework for the economic assessment of climate-change policy. Our main point of departure from existing work is the adoption of a "satisficing", as opposed to optimizing, modeling approach. Along these lines, we place primary emphasis on the extent to which different policies meet a set of goals at a specific future date instead of their performance vis-à-vis some intertemporal objective function. Consistent to the nature of climate-change policy making, our model takes explicit account of model uncertainty. To this end, the value function we propose is an analogue of the well-known success-probability criterion adapted to settings characterized by model uncertainty. We apply this decision criterion to probability distributions constructed by Drouet et al. (2015) linking carbon budgets to future consumption. The main result that emerges is the superiority of "medium" carbon budgets in line with a 3°C target (i.e., 2000-3000 GtCO2) in preventing large future consumption losses with high probability. Insights from computational geometry facilitate computations considerably, and allow for the efficient application of the model in high-dimensional settings.

Keywords: Satisficing; Model Uncertainty; Climate Change; Computational Geometry (search for similar items in EconPapers)
JEL-codes: C60 D81 Q42 Q48 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cmp, nep-ene and nep-env
Date: 2017-03
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