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American Economic Journal: Economic Policy: Vol. 6 No. 1 (February 2014)

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Watch Your Step: Optimal Policy in a Tipping Climate

Article 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.6.1.137

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.

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Authors

Lemoine, Derek (U AZ)
Traeger, Christian (U CA, Berkeley)

JEL Classifications

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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