Tipping Points and Ambiguity in the Economics of Climate Change

We model optimal policy when the probability of a tipping point, the welfare change due to a tipping point, and knowledge about a tipping point's trigger all depend on the policy path. Analytic results demonstrate how optimal policy depends on the ability to affect both the probability of a tipping point and also welfare in a post-threshold world. Simulations with a numerical climate-economy model show that possible tipping points in the climate system increase the optimal near-term carbon tax by up to 45% in base case specifications. The resulting policy paths lower peak warming by up to 0.5 degrees C compared to a model without possible tipping points. Different types of tipping points have qualitatively different effects on policy, demonstrating the importance of explicitly modeling tipping points' effects on system dynamics. Aversion to ambiguity in the threshold's distribution can amplify or dampen the effect of tipping points on optimal policy, but in our numerical model, ambiguity aversion increases the optimal carbon tax.

Issue Date:
Dec 16 2010
Publication Type:
PURL Identifier:
Total Pages:
JEL Codes:
Q54; D90; D81
Replaced with revised version of paper Feb 13, 2012 available at http://purl.umn.edu/120349
Series Statement:
CUDARE Working Papers

 Record created 2017-04-01, last modified 2017-05-27

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