Template-Type: ReDIF-Paper 1.0 Series: Tinbergen Institute Discussion Papers Creation-Date: 2020-12-21 Revision-Date: 2024-08-01 Number: 23-063/VI Author-Name: Michael Grubb Author-Workplace-Name: Institute for Sustainable Resources, UCL Author-Name: Rutger-Jan Lange Author-Workplace-Name: Erasmus University of Rotterdam Author-Name: Nicolas Cerkez Author-Workplace-Name: Department of Economics, UCL Author-Name: Claudia Wieners Author-Workplace-Name: Institute for Marine and Athmospheric Research, University of Utrecht Author-Name: Ida Sognnaes Author-Workplace-Name: Center for International Climate Research Author-Name: Pablo Salas Author-Workplace-Name: International Finance Corperation Title: Dynamic determinants of optimal global climate policy Abstract: We explore the impact of dynamic characteristics of greenhouse-gas emitting systems, such as inertia, induced innovation, and path-dependency, on optimal responses to climate change. Our compact and analytically tractable model, applied with stylized damage assumptions to derive optimal pathways, highlights how simple dynamic parameters affect responses including the optimal current effort and the cost of delay. The conventional cost-benefit result (i.e., an optimal policy with rising marginal costs that reflects discounted climate damages) arises only as a special case in which the dynamic characteristics of emitting systems are assumed to be insignificant. Our analysis highlights and distinguishes from the (often implicit) assumption in many cost-benefit models, which neglect inertia and assume exogenous technology progress. This tends to defer action. More generally, our model yields useful policy insights for the transition to deep decarbonization, showing that enhanced early action may greatly reduce both damages and abatement costs in the long run. Classification-JEL: C61, O30, Q54 Keywords: abatement, DICE, energy economics, inertia, innovation, path dependence, transition File-URL: https://papers.tinbergen.nl/23063.pdf File-Format: application/pdf File-Size: 1.145.297 bytes Handle: RePEc:tin:wpaper:20230063