Analytic Integrated Assessment and Uncertainty

I develop an analytic integrated assessment model of climate change. The paper closes a gap between complex numeric models used in policy advising and stylized models built for analytic insight. The climate component contains an explicit carbon cycle, the CO2 radiative forcing equation, and a atmosphere-ocean temperature dynamics. Economic production relies on various clean and dirty, and potentially scarce energy sources. I derive a closed-form solution of the optimal carbon tax and the welfare implications from uncertainty over the carbon cycle and the climate’s sensitivity to CO2. The formula pinpoints the different contributions from social preference, production, damages, and temperature and carbon dynamics. I discuss unforeseen persistent shocks to the system (vector autoregressive uncertainty) as well as epistemological uncertainty such as a Bayesian learning. The analysis employs non-logarithmic risk attitude and distinguishes risk aversion from a decision maker’s propensity to smooth consumption over time. JEL Codes: Q54, H43 ,E13 ,D81 ,D90 ,D61