ACE – Analytic Climate Economy (with Temperature and Uncertainty)
C. P. Traeger
1 December 2018
DOI: 10.2139/ssrn.3307622
This paper is a revised version of: https://ssrn.com/abstract=2667972.The Analytic Climate Economy (ACE) closes a gap between analytic climate change assessments and quantitative numeric integrated assessment models (IAMs) used in policy advising. Its closed-form solution links IAM components and parametric assumptions directly to their policy impacts. Its analytic nature overcomes Bellman's curse of dimensionality for a wide range of stochastic processes. ACE shows that uncertainty flips the main drivers of the carbon tax. Uncertainty also makes IAMs even more sensitive to the discount rate and its composition. Under a recent survey's median estimate for pure time preference, uncertainty almost triples the optimal tax.
keywords: climate change, integrated assessment, uncertainty, learning, risk aversion, recursive utility, social cost of carbon, carbon tax, carbon cycle, climate sensitivity, stochastic volatility, autoregressive gamma