Progress, Curse, or Mixed Blessing : The Impacts of Multiple Climate Ambiguities on the Optimal Carbon Emission Abatement Policy

Integrated assessment models (IAMs) are under criticism for their key components fall short of sufficient scientific justification and lack robustness. When using IAMs for policy assessment, a decision-maker might encounter ambiguities (Knightian uncertainties) with many facets. We develop a stylized climate decision model that accommodates three primary sources of ambiguity: (1) climate sensitivity to carbon emissions, (2) economic damages caused by climate change, and (3) cost-efficiency of the abatement policy. We show that various ambiguities affect the optimal carbon emission abatement policy in different directions. The ambiguities about climate sensitivity and economic damages increase the propensity to adopt the abatement policy. In contrast, the ambiguity about abatement cost-efficiency undermines the incentive. Considering the ambiguities jointly leads to optimal abatement policies significantly departing from those obtained by considering the ambiguities separately. The difference is shaped by the ambiguities’ individual effects, relative dominance, and relationships perceived by the decision-maker