American Economic Journal:
Economic Policy
ISSN 1945-7731 (Print) | ISSN 1945-774X (Online)
Watch Your Step: Optimal Policy in a Tipping Climate
American Economic Journal: Economic Policy
vol. 6,
no. 1, February 2014
(pp. 137–66)
Abstract
We investigate the optimal policy response to the possibility of abrupt, irreversible shifts in system dynamics. The welfare cost of a tipping point emerges from the policymaker's response to altered system dynamics. Our policymaker also learns about a threshold's location by observing the system's response in each period. Simulations with a recursive, numerical climate-economy model show that tipping possibilities raise the optimal carbon tax more strongly over time. The resulting policy paths ultimately lower optimal peak warming by up to 0.5°C. Different types of posttipping shifts in dynamics generate qualitatively different optimal pretipping policy paths.Citation
Lemoine, Derek, and Christian Traeger. 2014. "Watch Your Step: Optimal Policy in a Tipping Climate." American Economic Journal: Economic Policy, 6 (1): 137–66. DOI: 10.1257/pol.6.1.137Additional Materials
JEL Classification
- D78 Positive Analysis of Policy Formulation and Implementation
- H23 Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- Q54 Climate; Natural Disasters; Global Warming
- Q58 Environmental Economics: Government Policy
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