Dark Clouds or Silver Linings? Knightian Uncertainty and Climate Change

Funke, Michael; Chen, Yu-Fu; Glanemann, Nicole

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Dark Clouds or Silver Linings? Knightian Uncertainty and Climate Change

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Funke, M., Chen, Y.-F., & Glanemann, N. (2011). Dark Clouds or Silver Linings? Knightian Uncertainty and Climate Change. CESIFO WORKING PAPER, CATEGORY 9: RESOURCE AND ENVIRONMENT ECONOMICS, 3516.

Cite as: https://hdl.handle.net/11858/00-001M-0000-0018-6B0E-B

Abstract

This paper examines the impact of Knightian uncertainty upon optimalclimate policy through the prism of a continuous-time real optionmodelling framework. We analytically determine optimal intertemporalclimate policies under ambiguity. Additionally, numerical simulationsare provided to illustrate the properties of the model. The resultsindicate that increasing Knightian uncertainty accelerates climatepolicy, i.e. policymakers become more reluctant to postpone the timingof climate policies into the future.