Implications of a Lowered Damage Trajectory for Mitigation in a Continuous-Time Stochastic Model

This paper provides counterexamples to the idea that mitigation of greenhouse gases causing climate change, and adaptation to climate change, are always and everywhere substitutes. The author considers optimal policy for mitigating greenhouse gas e...

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Bibliographic Details
Main Author:	Strand, Jon
Format:	Policy Research Working Paper
Language:	English
Published:	2012
Subjects:	ADAPTATION ADAPTATION AFFECTS ADAPTATION COST ADAPTATION COSTS ADAPTATION DECISIONS ADAPTATION MEASURE ADAPTATION POLICY ADAPTATION RESPONSE ADAPTATION TO CLIMATE ADAPTATION TO CLIMATE CHANGE ADAPTIVE POLICY ADAPTIVE RESPONSE ANTICIPATORY ADAPTATION ATMOSPHERE CLIMATE CLIMATE CHANGE CLIMATE CHANGE DAMAGES CLIMATE DAMAGE CLIMATE DAMAGES CLIMATE IMPACT CLIMATE IMPACTS CLIMATE PROOFING COAL COSTS OF ADAPTATION DISCOUNT RATE ECOLOGICAL ECONOMICS ECONOMIC ACTIVITY ECONOMIC MODELS EMISSIONS ENERGY ECONOMICS ENVIRONMENTAL ECONOMICS ENVIRONMENTAL POLICY ENVIRONMENTAL SCIENCE FUTURE CLIMATE CHANGE GHG GHGS GREENHOUSE GREENHOUSE GAS GREENHOUSE GAS EMISSIONS GREENHOUSE GASES INFRASTRUCTURE INVESTMENT IPCC MARGINAL COST MITIGATION MITIGATION COST MITIGATION EFFORTS MITIGATION POLICY NEGATIVE IMPACT POLICY DISCUSSIONS POLICY IMPLICATIONS POLICY INTERVENTION POLICY INTERVENTIONS POLICY RESEARCH POWER PLANTS PP RENEWABLE ENERGY RESOURCE ECONOMICS RISK AVERSION STOCHASTIC PROCESS SUSTAINABLE DEVELOPMENT TEMPERATURES
Online Access:	http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20110701002720 http://hdl.handle.net/10986/3489

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Summary:	This paper provides counterexamples to the idea that mitigation of greenhouse gases causing climate change, and adaptation to climate change, are always and everywhere substitutes. The author considers optimal policy for mitigating greenhouse gas emissions when climate damages follow a geometric Brownian motion process with positive drift, and the trajectory for damages can be down-shifted by adaptive activities, focusing on two main cases: 1) damages are reduced proportionately by adaptation for any given climate impact ("reactive adaptation"); and 2) the growth path for climate damages is down-shifted ("anticipatory adaptation"). In this model mitigation is a lumpy one-off decision. Policy to reduce damages for given emissions is continuous in case 1, but may be lumpy in case 2, and reduces both expectation and variance of damages. Lower expected damages promote mitigation, and reduced variance discourages it (as the option value of waiting is reduced). In case 1, the last effect may dominate. Mitigation then increases when damages are dampened: mitigation and adaptation are complements. In case 2, mitigation and adaptation are always substitutes.

Implications of a Lowered Damage Trajectory for Mitigation in a Continuous-Time Stochastic Model

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