OPTIMAL CO2 CONTROL POLICY WITH STOCHASTIC LOSSES FROM TEMPERATURE RISE

In this paper, we present a new specification of warming cost and inco rporate it into an integrated assessment model of global climate chang e. In the new specification, warming cost is represented as the produc t of possible large warming related welfare losses which occur with sm all probabilities that depend on the amount of temperature rise. This is in contrast to the conventional representation of warming cost as a deterministic function of temperature rise. To avoid 'curse of dimens ionality' problems, we assume that losses affect the utility of consum ption without directly affecting consumption itself, and that the prob ability of losses occurring is independent of the number of losses tha t may have previously occurred. The results we obtain using this new a pproach depend importantly on the specification of the loss probabilit y function. Nevertheless, our results are qualitatively similar to pre vious results obtained using a deterministic specification of warming cost, in which cost is a cubic function of temperature rise.