Efficiency Gains from “What”-Flexibility in Climate Policy An Integrated CGE Assessment

Abstract

We investigate the importance of “what”-flexibility on top of “where”-and “when”-flexibility for alternative emission control schemes that prescribe long-term temperature targets and eventually impose additional constraints on the rate of temperature change. We find that “what”-flexibility substantially reduces the economic adjustment costs. When comparing policies that simply involve long-term temperature targets against more stringent strategies with constraints on the rate of temperature increase, it turns out that the latter involve much higher costs. The cost difference may be interpreted as additional insurance payments if climate damages should not only depend on absolute temperature change but also on the rate of temperature change.