Optimal greenhouse gas emissions under various assessments of climate change ambiguity

Abstract

The probabilities associated with global warming damage are likely to be continuously revised in the light of new information. Such revisions of probability are the defining characteristic of ambiguity, as opposed to risk. This paper examines how climate change ambiguity may affect optimal greenhouse gas emission strategies, via the decision maker's attitude towards anticipated changes of damage probabilities. Two conceptualizations of ambiguity are distinguished, according to the emphasis placed on the ambiguity of priors or on the ambiguity of news, respectively. It is shown that the way in which ambiguity is viewed and the attitude taken towards it have a substantial influence on the optimal emission trajectory. Copyright Kluwer Academic Publishers 1996