Watch Your Step: Optimal Policy in a Tipping Climate
- (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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