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Optimal CO2 mitigation under damage risk valuation

Author

Listed:
  • Benjamin Crost

    (University of Colorado Denver, Campus Box 181, Denver, Colorado 80217-3364)

  • Christian P. Traeger

    (207 Giannini Hall #3310, University of California Berkeley, Berkeley, California 94720-3310)

Abstract
The current generation has to set mitigation policy under uncertainty about the economic consequences of climate change. This uncertainty governs both the level of damages for a given level of warming, and the steepness of the increase in damage per warming degree. Our model of climate and the economy is a stochastic version of a model employed in assessing the US Social Cost of Carbon (DICE). We compute the optimal carbon taxes and CO2 abatement levels that maximize welfare from economic consumption over time under different risk states. In accordance with recent developments in finance, we separate preferences about time and risk to improve the model’s calibration of welfare to observed market interest. We show that introducing the modern asset pricing framework doubles optimal abatement and carbon taxation. Uncertainty over the level of damages at a given temperature increase can result in a slight increase of optimal emissions as compared to using expected damages. In contrast, uncertainty governing the steepness of the damage increase in temperature results in a substantially higher level of optimal mitigation.

Suggested Citation

  • Benjamin Crost & Christian P. Traeger, 2014. "Optimal CO2 mitigation under damage risk valuation," Nature Climate Change, Nature, vol. 4(7), pages 631-636, July.
    • Handle: RePEc:nat:natcli:v:4:y:2014:i:7:d:10.1038_nclimate2249
    DOI: 10.1038/nclimate2249
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