Dark Clouds or Silver Linings? Knightian Uncertainty and Climate Change
24 Pages Posted: 21 Jul 2011
Date Written: July 21, 2011
Abstract
This paper examines the impact of Knightian uncertainty upon optimal climate policy through the prism of a continuous-time real option modelling framework. We analytically determine optimal intertemporal climate policies under ambiguity. Additionally, numerical simulations are provided to illustrate the properties of the model. The results indicate that increasing Knightian uncertainty accelerates climate policy, i.e. policymakers become more reluctant to postpone the timing of climate policies into the future.
Keywords: climate change, Knightian uncertainty, κ ambiguity, real options
JEL Classification: C610, D810, Q540
Suggested Citation: Suggested Citation
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