Optimal Commitment Under Uncertainty: Adjustment Rules for Climate Policy
Michael Jakob, Mercator Research Institute on Global Commons and Climate Change (MCC), Germany, firstname.lastname@example.org
Steffen Brunner, Potsdam Institute for Climate Impact Research, Germany,
Michael Jakob and Steffen Brunner (2014), "Optimal Commitment Under Uncertainty: Adjustment Rules for Climate Policy", Strategic Behavior and the Environment: Vol. 4: No. 3, pp 291-310. http://dx.doi.org/10.1561/102.00000047
3. Full, No, and Intermediate Commitment in a Deterministic Setting
4. Commitment Under Uncertainty
5. Implementing Adjustment Rules
This paper analyses the optimal type and degree of commitment to a future climate policy when damage costs from climate change are uncertain. Taking uncertainty into account, it is shown within the framework of a sequential game between firms and a regulator that commitment to an emission abatement target fails to achieve the first best optimal outcome. Though commitment to a future policy reduces the risk of time-inconsistency, it imposes costs in the form of reduced flexibility to respond to new information. If, however, the regulator commits to an adjustment rule that sets the abatement level contingent on the realization of the uncertain parameter, the first best optimal outcome can be obtained.