Welfare specifications and optimal control of climate change: an application of fund

The sensitivity of the optimal control of carbon dioxide emissions to the specification of the social welfare function is systematically explored using the FUND model. Increasing risk aversion emphasises climate change damages relative to emission reduction costs, but at the same time increases the discount rate of consumption. Without international co-operation, the discount rate effect dominates so that optimal control decreases with increasing risk aversion. With international co-operation, optimal control first increases then decreases with increasing risk aversion. Since climate change falls heaviest on the poor, optimal control increases with increasing inequity aversion. Full-fledged intergenerational welfare functions on the one hand emphasise climate change damages but on the other hand place more weight on current, poorer generations. In FUND, the two tendencies almost cancel. 2002 Elsevier Science B.V. All rights reserved. JEL classifications: Q25; Q28; Q40