Abstract:

Climate tipping points make climate change abrupt and unpredictable. When crossed, the world climate enters a high temperature regime, which can be extremely costly, if not impossible, to revert. This paper examines the economic costs associated with the irreversibility and unpredictability of climate tipping points. I develop a dynamic stochastic general equilibrium model integrated with a climate model that accounts for positive feedback allowing for positive feedback effects, which induce tipping points. I analyse the costs faced by a social planner who adopts abatement policies under the assumption of a remote tipping point, even when the tipping point is imminent, and who switches to optimal abatement only after crossing it. I denote the costs of this strategy “regret”. I show that it is socially optimal to "slam the brakes" and stabilise the climate quickly after tipping. However, delayed action induces large regret, suggesting that it is more cost-effective to act prudently in the face of uncertainty surrounding tipping points.