Abstract
The Paris Climate Agreement aims to keep temperature rise well below 2 °C. This implies mitigation costs as well as avoided climate damages. Here we show that independent of the normative assumptions of inequality aversion and time preferences, the agreement constitutes the economically optimal policy pathway for the century. To this end we consistently incorporate a damage-cost curve reproducing the observed relation between temperature and economic growth into the integrated assessment model DICE. We thus provide an inter-temporally optimizing cost-benefit analysis of this century’s climate problem. We account for uncertainties regarding the damage curve, climate sensitivity, socioeconomic future, and mitigation costs. The resulting optimal temperature is robust as can be understood from the generic temperature-dependence of the mitigation costs and the level of damages inferred from the observed temperature-growth relationship. Our results show that the politically motivated Paris Climate Agreement also represents the economically favourable pathway, if carried out properly.
Highlights
Background information on the social preferencesThe preferences as displayed in Fig. 5 are represented by the initial rate of social time preference’ (IRSTP) and the elasticity of the marginal utility of consumption
We account for uncertainty in the future temperature development by considering three alternative equilibrium climate sensitivity (ECS)
We examine the effects of uncertainty in the BHM estimates concerning the parameter values and the model specification
Summary
Background information on the social preferencesThe preferences as displayed in Fig. 5 are represented by the IRSTP and the elasticity of the marginal utility of consumption. Ρ relates to impatience in consumption; a higher IRSTP gives more emphasis to present rather than to future utility. In such a case, society is inclined to consume more today and to invest less for future consumption potential. The elasticity of the marginal utility of consumption θ, θ ≥ 0, determines the gain in utility due to additional consumption, irrespective of the timing of its appearance. It enters the utility function as (
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