Dark Clouds or Silver Linings? Knightian Uncertainty and Climate Change

24 Pages Posted: 21 Jul 2011

See all articles by Yu-Fu Chen

Yu-Fu Chen

University of Dundee - Department of Economic Studies

Michael Funke

University of Hamburg - Department of Economics; Tallinn University of Technology (TUT)

Nicole Glanemann

University of Hamburg - Faculty of Economics and Business Administration

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

Chen, Yu-Fu and Funke, Michael and Glanemann, Nicole, Dark Clouds or Silver Linings? Knightian Uncertainty and Climate Change (July 21, 2011). CESifo Working Paper Series No. 3516, Available at SSRN: https://ssrn.com/abstract=1891835 or http://dx.doi.org/10.2139/ssrn.1891835

Yu-Fu Chen

University of Dundee - Department of Economic Studies ( email )

Dundee DD1 4HN, Scotland
United Kingdom
+44 1382 344 383 (Phone)
+44 1382 344 691 (Fax)

Michael Funke (Contact Author)

University of Hamburg - Department of Economics ( email )

Von-Melle-Park 5
room 2128 C rise
Hamburg, 20146
Germany

Tallinn University of Technology (TUT) ( email )

Ehitajate tee 5
Tallinn, 12618
Estonia

Nicole Glanemann

University of Hamburg - Faculty of Economics and Business Administration ( email )

Von-Melle-Park 5
Hamburg, 20146
Germany

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
110
Abstract Views
960
Rank
450,735
PlumX Metrics