Optimal Climate Policy for a Pessimistic Social Planner

This paper characterizes the preferences of a pessimistic social planner concerned with the potential costs of extreme, low-probability climate events. This pessimistic attitude is represented by a recursive optimization criterion à la Hansen and Sargent (IEEE Trans Autom Control 40:968–971, 1995 )...

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Bibliographic Details
Published in:Environmental & resource economics 2019-02, Vol.72 (2), p.411-443
Main Authors: Valentini, Edilio, Vitale, Paolo
Format: Article
Language:English
Subjects:
Aggressiveness
Aversion
Carbon sequestration
Climate
Climate policy
Economic models
Economic Policy
Economics
Economics and Finance
Emissions
Environmental Economics
Environmental Law/Policy/Ecojustice
Environmental Management
Environmental policy
Mitigation
Optimization
Pessimism
Pollution
Pollution control
Risk aversion
Robustness
Sharpness
Time lag
Uncertainty
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Summary:This paper characterizes the preferences of a pessimistic social planner concerned with the potential costs of extreme, low-probability climate events. This pessimistic attitude is represented by a recursive optimization criterion à la Hansen and Sargent (IEEE Trans Autom Control 40:968–971, 1995 ) implying that a very sharp and early mitigation effort arises as the optimal climate policy. We find that for sufficiently high levels of risk-aversion an aggressive mitigation policy is chosen even when the discount factor is low. The dynamics of the optimal mitigation policy displays an inverted policy ramp with a sharp and immediate mitigation effort, followed by a gradual reduction until the pollution stock converges towards its long-run equilibrium. We also observe that the initial sharpness of the mitigation effort requires substantial capture and sequestration of carbon from the atmosphere. We extend our analysis showing that when the social planner observes the concentration and emission levels with a time lag, she undertakes a more aggressive policy to reduce the greater degree of uncertainty she faces. Finally, we show under which conditions the optimal mitigation policy dictated by our analysis coincides with that derived using the robustness approach of Hansen and Sargent (Robustness, Princeton University Press, Princeton, 2008 ).
ISSN:0924-6460
1573-1502
DOI:10.1007/s10640-017-0199-3