Models on CO2 abatement under uncertainty

Lontzek, Thomas S.

The major goal of this thesis is to contribute answering the question how changes in economic actions affect the climate and at the same time, how do changes in the climate affect the economy. This thesis consists of three parts. In the first part (Chapter 2) we stress the role of the oceans as a sink for atmospheric carbon by developing a dynamic global carbon cycle model with two reservoirs containing atmosphere and two ocean layers. We consider a special form of carbon capture and storage: The capture of carbon and its sequestration into the deep ocean reservoir. Adding a non-renewable resource stock we study the socially optimal extraction and carbon capture and storage decision rules. We show that carbon capture and storage accelerates the slow natural flux within the carbon cycle, and because of its temporary abatement character it dampens the overshooting of the atmospheric reservoir. After studying the decentralized economy we show that the optimal carbon tax has an inverted u-shape. Depending on the initial sizes of the reservoirs and the speed of carbon fluxes between the reservoirs carbon taxes can also be increasing, decreasing or u-shaped. Our model is the first of its kind which can generate this result. Furthermore, we conclude that the level of the carbon tax should be positively adjusted to account for (i) damage uncertainty and (ii) the declining ability of the deep ocean to absorb atmospheric carbon. In the second part of the thesis (Chapter 3) we apply standardized numerical techniques of stochastic optimization to the climate change issue. We ask the question how the optimal mitigation of climate change evolves if intrinsic uncertainty about damage is inherent to the model. In particular, we are interested in how the effect of uncertainty on climate change mitigation changes with different levels of risk aversion. A major finding is that the effects of stochasticity differ even in sign as to emission control with varying parameters: introduction of stochasticity may increase or decrease emission control depending on the specific parameter setting. Our analysis covers a large range of the parameter space, in particular the degree of risk aversion and the level of uncertainty. We identify regions of the state space for which higher levels of uncertainty or risk aversion result in different policy rules for emission control. Similarly, given a certain state of the world we conclude that the effect of uncertainty on emission control changes (in level and sign) with the degree of risk aversion. In other words, uncertainties in climatic trends may induce people's precautionary emission reduction but also may drive away money from abatement. In the third part of the thesis (Chapter 4) we are interested in how a capital stock which is linked to a polluting technology is maintained, accumulated and utilized optimally. In order to analyze the inter- and intra-sectoral tradeoffs between capacity building and capacity using which guide the economy's transition process towards a balanced growth equilibrium we develop a model with two production sectors that generate a homogenous consumption good. The production processes in these two sectors differ with respect to the technology which is used. While in one sector the process is clean, generating output in the other sector also creates environmental damage. The technologies are completely embedded in the corresponding stock of physical capital. Hence, the application of one technology can only be intensified by investing more in the associated capital stock or utilizing it more intensively. Our findings show that the combination of heterogeneous capital, endogenous depreciation and capital intensity is essential for extracting qualitative and quantitative implications for policy makers about the easiness of a technology switch. If the economic environment requires a change in the energy portfolio, an economy driven by our model structure can not react without severe time lags, due to the ex post clay nature of investment. Installation of the desired capital stock simply takes time if we do not want to abstain from smooth consumption patterns. In a next step we introduce a stock of carbon which is subject to uncertainty. With this modification we can investigate how uncertainty about damage resulting from climate change influences the optimal interplay between capacity building and capacity utilization in a more realistic environment. We conclude that increasing uncertainty intensifies the need for a rapid build-up of the clean capital stock. It also reduces the demand for effective capital services associated with the polluting technology.

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Lontzek, Thomas: Models on CO2 abatement under uncertainty. 2009.

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