Working Paper: NBER ID: w29064
Authors: Michael Barnett; William Brock; Lars P. Hansen
Abstract: The design and conduct of climate change policy necessarily confronts uncertainty along multiple fronts. We explore the consequences of ambiguity over various sources and configurations of models that impact how economic opportunities could be damaged in the future. We appeal to decision theory under risk, model ambiguity and misspecification concerns to provide an economically motivated approach to uncertainty quantification. We show how this approach reduces the many facets of uncertainty into a low dimensional characterization that depends on the uncertainty aversion of a decision-maker or fictitious social planner. In our computations, we take inventory of three alternative channels of uncertainty and provide a novel way to assess them. These include i) carbon dynamics that capture how carbon emissions impact atmospheric carbon in future time periods; ii) temperature dynamics that depict how atmospheric carbon alters temperature in future time periods; iii) damage functions that quantify how temperature changes diminish economic opportunities. We appeal to geoscientific modeling to quantify the first two channels. We show how these uncertainty sources interact for a social planner looking to design a prudent approach to the social pricing of carbon emissions.
Keywords: No keywords provided
JEL Codes: D81; E61; G12; G18; Q51; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Carbon dynamics (Q54) | Atmospheric carbon (Q54) |
| Atmospheric carbon (Q54) | Temperature changes (E39) |
| Temperature changes (E39) | Economic damages (K13) |
| Carbon dynamics (Q54) | Temperature changes (E39) |
| Temperature changes (E39) | Social cost of carbon (SCC) (H43) |
| Carbon dynamics (Q54) | Social cost of carbon (SCC) (H43) |