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The determination of optimal climate policy

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  • Aaheim, Asbjørn

Abstract

Analyses of the costs and benefits of climate policy, such as the Stern Review, evaluate alternative strategies to reduce greenhouse gas emissions by requiring that the cost of emission cuts in each and every year has to be covered by the associated value of avoided damage, discounted by a an exogenously chosen rate. An alternative is to optimize abatement programmes towards a stationary state, where the concentrations of greenhouse gases are stabilized and shadow prices, including the rate of discount, are determined endogenously. This paper examines the properties of optimized stabilization. It turns out that the implications for the evaluation of climate policy are substantial if compared with evaluations of the present value of costs and benefits based on exogenously chosen shadow prices. Comparisons of discounted costs and benefits tend to exaggerate the importance of the choice of discount rate, while ignoring the importance of future abatement costs, which turns out to be essential for the optimal abatement path. Numerical examples suggest that early action may be more beneficial than indicated by comparisons of costs and benefits discounted by a rate chosen on the basis of current observations.

Suggested Citation

  • Aaheim, Asbjørn, 2010. "The determination of optimal climate policy," Ecological Economics, Elsevier, vol. 69(3), pages 562-568, January.
  • Handle: RePEc:eee:ecolec:v:69:y:2010:i:3:p:562-568
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    1. Nordhaus, William D, 1991. "To Slow or Not to Slow: The Economics of the Greenhouse Effect," Economic Journal, Royal Economic Society, vol. 101(407), pages 920-937, July.
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    Cited by:

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    4. E. V. Petracou & A. Xepapadeas & A. N. Yannacopoulos, 2017. "Climate Change and Environmentally Induced Migration Across Regions: Cooperative and Non-cooperative Solutions," Homo Oeconomicus: Journal of Behavioral and Institutional Economics, Springer, vol. 34(2), pages 137-164, November.
    5. Eskeland, Gunnar S., 2013. "Leadership in Climate Policy: Is there a case for Early Unilateral Unconditional Emission Reductions?," Discussion Papers 2013/6, Norwegian School of Economics, Department of Business and Management Science.
    6. Baker, Erin & Olaleye, Olaitan & Aleluia Reis, Lara, 2015. "Decision frameworks and the investment in R&D," Energy Policy, Elsevier, vol. 80(C), pages 275-285.
    7. Luca Locatelli & Maria Guerrero & Beniamino Russo & Eduardo Martínez-Gomariz & David Sunyer & Montse Martínez, 2020. "Socio-Economic Assessment of Green Infrastructure for Climate Change Adaptation in the Context of Urban Drainage Planning," Sustainability, MDPI, vol. 12(9), pages 1-18, May.
    8. Peng Li & Weizhou Zhong, 2020. "An Optimization Management Model for Countries with Mutually Competitive Regions," Sustainability, MDPI, vol. 12(6), pages 1-14, March.
    9. Asbjørn Aaheim & Taoyuan Wei & Bård Romstad, 2017. "Conflicts of economic interests by limiting global warming to +3 °C," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 22(8), pages 1131-1148, December.

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