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.
"Watch Your Step: Optimal Policy in a Tipping Climate."
American Economic Journal: Economic Policy,
Positive Analysis of Policy Formulation and Implementation
Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies
Climate; Natural Disasters; Global Warming
Environmental Economics: Government Policy