Tipping Points in Dynamic Stochastic Integrated Assessment Models

There is great uncertainty about the impact of anthropogenic carbon on future economic wellbeing.

We use DSICE, a dynamic stochastic general equilibrium (DSGE) model of integrated climate and economy to account for abrupt and irreversible climate change. DSICE is an extension of the DICE2007 model of William Nordhaus, which incorporates beliefs about the uncertain economic impact of possible climate tipping events and uses empirically plausible parameterizations of Epstein-Zin preferences to represent attitudes towards risk. 

In this series of studies we model climate shocks in the form of a stochastic tipping points,  and investigate the impact of a tipping point externality on optimal mitigation policy. We find that the uncertainty associated with anthropogenic climate change imply carbon taxes much higher than implied by deterministic models. This analysis indicates that there is much greater urgency to immediately enact significant GHG policies than implied by DICE2007 and similar models that ignore uncertainty.

THE BASELINE CARBON TAX IN THE DETERMINISTIC DICE MODEL (WITH NO TIPPING POINT) IS SHOWN IN BLACK. THE EXPECTED ADDITIONAL CARBON TAX WHEN INCLUDING A STOCHASTIC TIPPING POINT IS INDICATED IN BLUE. RED LINES INDICATE THE ADDITIONAL CARBON TAX WHEN THE EXPONENT OF THE DAMAGE FUNCTION IN THE DETERMINISTIC DICE MODEL IS INCREASED TO FOURTH (SOLID LINE) AND SIXTH (DASHED LINE) ORDER. REPRODUCED FROM (LONTZEK ET AL 2015)

THE BASELINE CARBON TAX IN THE DETERMINISTIC DICE MODEL (WITH NO TIPPING POINT) IS SHOWN IN BLACK. THE EXPECTED ADDITIONAL CARBON TAX WHEN INCLUDING A STOCHASTIC TIPPING POINT IS INDICATED IN BLUE. RED LINES INDICATE THE ADDITIONAL CARBON TAX WHEN THE EXPONENT OF THE DAMAGE FUNCTION IN THE DETERMINISTIC DICE MODEL IS INCREASED TO FOURTH (SOLID LINE) AND SIXTH (DASHED LINE) ORDER. REPRODUCED FROM (LONTZEK ET AL 2015)

 

People

Yongyang Cai | Kenneth Judd | Timothy Lenton | Thomas Lontzek 

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