Ploeg 2014). To develop the intuition, first suppose that the tipping point is a known temperature increase, say 3° Celsius above preindustrial levels, and that the economic consequences of crossing the tipping point are severe, and temporarily put aside other reasons for reducing carbon emissions. Under these assumptions climate policy would allow temperature to rise, stopping just short of the 3° increase. In contrast, now suppose that the tipping point is unknown and that its estimated mean is 3°, but that it could be less or more with equal probability. In this case, the policy that stops just short of 3° warming runs a large risk of crossing the true tipping point. Because that mistake would be very costly, the uncertainty about the tipping point generally leads to a policy that is more stringent today than it would be absent uncertainty. To the extent that delayed implementation means higher long-run CO2 concentrations, then the risks of hitting a tipping point increase with delay.
As a simplification, the above description assumes away other costs of climate change that increase smoothly with temperature, as well as the reality that important tipping points in biological systems could be crossed by small gradual changes in temperatures, so as to focus on the consequences of uncertainty about large-scale temperature changes. When the two sets of costs are combined, the presence of potential large-scale changes increases the benefits of mitigation policies, and the presence of uncertainty about tipping points that would produce abrupt changes increases those benefits further.[1] Cai, Judd, and Lontzek (2013) use a dynamic stochastic general equilibrium version of DICE model that is modified to include multiple tipping points with unknown (random) locations. To avoid the Weitzman “infinities” problem, they focus on tipping events with economic consequences that are large (5 or 10 percent of global GDP) but fall short of global economic collapses. They conclude that the possibility of future tipping points increases the optimal carbon price today: in their benchmark case, the optimal pre-tipping carbon price more than doubles, relative to having no tipping point dynamics. Similarly, Lemoine and Traeger (2012) embed unknown tipping points in the DICE model and estimate that the optimal carbon price increases by 45 percent as a result. In complementary work, Barro (2013) considers a simplified model in which the only benefits of reducing carbon emissions come from reducing the probability of potential climate catastrophes, and finds that this channel alone can justify investment in reducing GHG pollution of one percent of GDP or more, beyond what would normally occur in the market absent climate policy.
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- ↑ Cai, Judd, and Lontzek (2013) provide a stark example of this dynamic. Their analysis, which is undertaken using a modified version of Nordhaus’s (2008) DICE-2007 model, includes both the usual reasons for emissions mitigation (damages that increase smoothly with temperature) and the possibility of a tipping point at an uncertain future temperature which results in a jump in damages.
