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How Delayed Learning about Climate Uncertainty Impacts Decarbonization Investment Strategies

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  • Bauer,Adam Michael
  • Mcisaac,Florent John
  • Hallegatte,Stephane

Abstract

The Paris Agreement established that global warming should be limited to “well below” 2°C and encouraged efforts to limit warming to 1.5°C. Achieving this goal presents a challenge, especially given (i) economic inertia and adjustment costs, which penalize a swift transition away from fossil fuels, and (ii) climate uncertainty that, for example, hinders the ability to predict the amount of emissions that can be released before a given temperature target is exceeded. This paper presents a modeling framework that explores optimal decarbonization investment strategy when both adjustment costs and climate uncertainty are present. The findings show that climate uncertainty impacts investment in three ways: (i) the cost of policy increases, especially when adjustment costs are present; (ii) abatement investment is front-loaded relative to the certainty policy; and (iii) the sectoral allocation of investment changes to favor declining investment pathways rather than bell-shaped paths. The latter effect is especially pronounced in hard-to-abate sectors, such as heavy industry. Each of these effects can be traced back to the carbon price distribution inheriting a “heavy tail” when climate uncertainty is present. The paper highlights how climate uncertainty and adjustment costs combined result in a more aggressive least-cost strategy for decarbonization investment.

Suggested Citation

  • Bauer,Adam Michael & Mcisaac,Florent John & Hallegatte,Stephane, 2024. "How Delayed Learning about Climate Uncertainty Impacts Decarbonization Investment Strategies," Policy Research Working Paper Series 10743, The World Bank.
  • Handle: RePEc:wbk:wbrwps:10743
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    References listed on IDEAS

    as
    1. Yongyang Cai, 2019. "Computational Methods in Environmental and Resource Economics," Annual Review of Resource Economics, Annual Reviews, vol. 11(1), pages 59-82, October.
    2. M. T. Dvorak & K. C. Armour & D. M. W. Frierson & C. Proistosescu & M. B. Baker & C. J. Smith, 2022. "Estimating the timing of geophysical commitment to 1.5 and 2.0 °C of global warming," Nature Climate Change, Nature, vol. 12(6), pages 547-552, June.
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