Choosing the optimal climate change policy in the presence of catastrophic risk

Francesco Bosello, Enrica De Cian () and Licia Ferranna

No 2012/03, EIB Working Papers from European Investment Bank (EIB)

Abstract: This paper contributes to the normative literature on mitigation and adaptation by analyzing their optimal policy balance in the context of climate catastrophic risk. The investigation enriches an integrated assessment model introducing the endogenous link between the probability of experiencing a climate-change related catastrophic event, the temperature increase caused by GHG emissions, and ultimately abatement choices. Results indicate that the presence of catastrophic risk induces substantial mitigation effort even in a non-cooperative setting, where usually global cooperation on climate, and accordingly substantive emission reductions, do not succeed. The policy balance is realigned from adaptation toward more mitigation, and the responsiveness of mitigation to changes in adaptation decreases. Compared to a world without climate catastrophes, risk reduces the substitutability between adaptation and mitigation because only mitigation can influence the catastrophic probability. In this setting, our analysis also shows that adaptation funds and strategic unilateral commitments to adaptation are not the most efficient ways of buying emission reduction in less developed countries, though they could create some welfare gains and induce abatement in the recipient countries.

Keywords: climate change; mitigation; adaptation; climate risk; integrated assessment (search for similar items in EconPapers)
JEL-codes: C61 D58 Q5 (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:eibwps:201203

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