Publication: How Delayed Learning about Climate Uncertainty Impacts Decarbonization Investment Strategies
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2024-03-29
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2024-03-29
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The Paris Agreement established that global warming should be limited to “well below” 2°C and encouraged efforts to limit warming to 1.5°C. Achieving this goal presents a challenge, especially given (i) economic inertia and adjustment costs, which penalize a swift transition away from fossil fuels, and (ii) climate uncertainty that, for example, hinders the ability to predict the amount of emissions that can be released before a given temperature target is exceeded. This paper presents a modeling framework that explores optimal decarbonization investment strategy when both adjustment costs and climate uncertainty are present. The findings show that climate uncertainty impacts investment in three ways: (i) the cost of policy increases, especially when adjustment costs are present; (ii) abatement investment is front-loaded relative to the certainty policy; and (iii) the sectoral allocation of investment changes to favor declining investment pathways rather than bell-shaped paths. The latter effect is especially pronounced in hard-to-abate sectors, such as heavy industry. Each of these effects can be traced back to the carbon price distribution inheriting a “heavy tail” when climate uncertainty is present. The paper highlights how climate uncertainty and adjustment costs combined result in a more aggressive least-cost strategy for decarbonization investment
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“Bauer, Adam Michael; McIsaac, Florent; Hallegatte, Stéphane. 2024. How Delayed Learning about Climate Uncertainty Impacts Decarbonization Investment Strategies. Policy Research Working Paper; 10743. © World Bank. http://hdl.handle.net/10986/41323 License: CC BY 3.0 IGO.”
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