Watch your step: Optimal policy in a tipping climate

Derek Lemoine, Christian Traeger

Research output: Contribution to journalArticle

106 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)137-166
Number of pages30
JournalAmerican Economic Journal: Economic Policy
Volume6
Issue number1 B
DOIs
StatePublished - Feb 21 2014

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)

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