Decision Making in the Face of Economic and Climate Uncertainty

Paper Session

Saturday, Jan. 7, 2017 2:30 PM – 4:30 PM

Swissotel Chicago, Vevey 1
Hosted By: Agricultural and Applied Economics Association
  • Chair: Thomas Hertel, Purdue University

Developing long-run agricultural R&D policy in the face of uncertain economic growth

Yongyang Cai
,
University of Chicago and Hoover Institution
Alla Golub
,
Purdue University
Thomas Hertel
,
Purdue University
Kenneth Judd
,
Hoover Institution

Abstract

Projecting economic growth, population and climate over the 21st century is challenging. One approach to this problem has been the development of Shared Socioeconomic Pathways (SSPs) designed to provide a consistent characterization of alternative evolutions of population, per capita income and climate. However, recent analysis has shown that the true extent of future growth uncertainty is likely far greater than that embodied in the SSPs. We build on the innovative work of Christensen et al., in order to construct 13 independent probability distributions of economic growth in the 21st century. For each of these distributions, we use a stochastic dynamic partial equilibrium model of global land use to compute the optimal rate of R&D investment as well as the ensuing path of Total Factor Productivity (TFP) growth to 2100. When there is a significant probability of non-positive growth, the optimal response is to invest a lot in R&D today, and maintain a fairly flat trajectory over the entire century. This is in sharp contrast to the optimal path when growth rates are strictly positive. In this case, R&D spending starts out slow, and accelerates over time. Since we do not know which expert, if any, is correct, we propose a novel approach to dealing with this ambiguity by minimizing the maximum regret across all 13 optimal growth paths. This results in 40% higher R&D spending early in the century than that dictated by a mean growth rate deterministic model. However, by mid-century, optimal R&D spending levels off, and the resulting TFP plateaus by the end of the century at a level which is about twice as high as at the start.

Robust Consumption and Energy Decisions

Evan Anderson
,
Northern Illinois University
William Brock
,
University of Wisconsin-Madison and University of Missouri-Columbia
Alan Sanstad
,
University of Chicago

Abstract

We study a simple model of economic growth where society’s preferences are a function of consumption per capita and climate quality; and the specification of the climate dynamics is inspired by recent work in climate science. The model is estimated to establish a reference model and we develop a new method that determines the reasonable size of a set of surrounding models which are difficult to distinguish from the reference model. We show that robust agents who deny the effects of climate change on the economy, behave more like agents who believe climate changes are real. This happens because robust non-believers design policies that hedge against their worst case model which does include an anthropogenic effect of their emissions on climate and these changes in climate have negative effects on preferences and productivity.

Climate Change Economics and Heat Transport Across the Globe: Spatial-DSICE

William Brock
,
University of Wisconsin-Madison and University of Missouri-Columbia
Yongyang Cai
,
Ohio State University
Anastasios Xepapadeas
,
Athens University of Economics and Business

Abstract

This paper extends the stochastic DSICE model of Cai et al. (Cai et al. 2015a, 2015b) to include the case of spatial transport of heat and moisture from the Equator to the Poles. This well-known and important phenomenon in climate science has been neglected in popular IAM’s, e.g. RICE and DICE (Nordhaus 2010, 2013). Spatial transport leads to another well-known phenomenon in climate science called polar amplification where a one degree increase in the global yearly mean temperature anomaly causes a more than one degree increase of the yearly mean temperature anomaly in the high latitudes (Langen and Alexeev 2007). This extension allows us to compare the optimal paths of key quantities like the Social Cost of Carbon (SCC), emissions, abatement, and damages and their uncertainty bands when heat and moisture transport are neglected as in the received literature on IAMs to when this important phenomenon documented by climate science is included. We view our paper as a first step towards adding additional aspects of climate dynamics like heat and moisture transport across latitudes and polar amplification to the existing literature on IAMs.
Discussant(s)
Mario Miranda
,
Ohio State University
JEL Classifications
  • Q0 - General