Climatic tipping points and optimal fossil fuel use

The economics of climate change is characterized by many uncertain- ties, including climate dynamics, economic damages and potentially ir- reversible climate catastrophes. Using an optimal growth model of a fossil-fuel driven economy subject to a climate externality and potentially irreversible climatic events, this paper contributes to the understanding of how the risk of such events impacts on optimal fossil-fuel over time. Catastrophic events are modelled as irreversible abrupt changes in the underlying system dynamics. Our analytical results reveals the existence of three important e ects concerning optimal fossil-fuel use; i) the exis- tence of such events will increase the present value of marginal damages which works to postpone extraction ii) the probability of an event occur- ring sometime in the future also lowers the value of using fossil-fuels in the future which creates incentives to use more of the resource today iii) if the probability of a regime shift increases in fossil-fuel use this creates incentives to further postpone usage. Depending on the speci cation of the hazard rate process, which of the above e ects dominates and the as- sumptions made regarding the abundance of fossil-fuel reserves, optimal extraction may become either increasingly precautionary or aggressive as a result of including potentially catastrophic events in the model.

Accessible online here

Keywords: Catastrophic events, climate change, economic growth, hazard

Citation: Gars, J., Engström, G. 2015 Beijer Discussion Paper no. 250

Climatic tipping points and optimal fossil fuel use

Climatic tipping points and optimal fossil fuel use

Den här webbplatsen använder cookiesför statistik och användarupplevelse.

gedb använder cookies för att förbättra din användarupplevelse, för att ge underlag till förbättring och vidareutveckling av hemsidan samt för att kunna rikta mer relevanta erbjudanden till dig.

Läs gärna vår personuppgiftspolicy. Om du samtycker till vår användning, välj Tillåt alla. Om du vill ändra ditt val i efterhand hittar du den möjligheten i botten på sidan.