Irreversibility and Optimal Timing of Climate Policy
Justin Caron and
Markus Ohndorf ()
No 10-14, IED Working paper from IED Institute for Environmental Decisions, ETH Zurich
We focus on the optimal timing of climate change mitigation policies, a decision which is complicated by multiple sources of irreversibility or inertia. The pertinence of Real Option Theory in understanding the optimal amount of necessary precautionary behavior is explored, as are the results from modeling exercises. Generally, it appears that irreversibility associated with sunk abatement capital is stronger than that from accumulating greenhouse gas emissions, implying an "option value" to delaying climate change mitigation. The inclusion of tipping points, or non-linearities in environmental damages, could nevertheless lead to the opposite conclusion. These effects are however not easily quantifiable and are not generally included in modeling exercises. The timing decision will therefore have to be made by policy makers after having subjectively evaluated the importance of potential tipping points. It is for this reason that policy-makers need to be able to themselves understand the intuition behind Real Option theory - the interplay between irreversibility and uncertainty. Many climate-economic modeling exercises have implicitly recognized this fact by integrating strict environmental targets which serve as hard constraints and represent precautionary behavior.
Keywords: irreversibility; inertia; uncertainty; optimal timing; climate policy; real options (search for similar items in EconPapers)
JEL-codes: D61 Q54 Q58 (search for similar items in EconPapers)
Pages: 26 pages
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6) Track citations by RSS feed
Downloads: (external link)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.ied.ethz.ch/pub/pdf/IED_WP14_Caron_Ohndorf.pdf [301 Moved Permanently]--> https://www.ied.ethz.ch/pub/pdf/IED_WP14_Caron_Ohndorf.pdf [301 Moved Permanently]--> https://ied.ethz.ch/pub/pdf/IED_WP14_Caron_Ohndorf.pdf)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:ied:wpsied:10-14
Access Statistics for this paper
More papers in IED Working paper from IED Institute for Environmental Decisions, ETH Zurich Contact information at EDIRC.
Bibliographic data for series maintained by ().