The major goal of this thesis is to contribute answering the
question how changes in economic actions affect the climate and at the same time, how do changes in the climate affect the economy.
This thesis consists of three parts. In the first part (Chapter 2) we stress the role of the oceans as a sink for atmospheric carbon by developing a dynamic global carbon cycle model with two reservoirs containing atmosphere and two ocean layers. We consider a special form of carbon capture and storage: The capture of carbon and its sequestration into the deep ocean reservoir. Adding a non-renewable
resource stock we study the socially optimal extraction and carbon capture and storage decision rules. We show that carbon capture and storage accelerates the slow natural flux within the carbon cycle, and because of its temporary abatement character it dampens the overshooting of the atmospheric reservoir. After studying the decentralized economy we show that the optimal carbon tax has an
inverted u-shape. Depending on the initial sizes of the reservoirs and the speed of carbon fluxes between the reservoirs carbon taxes can also be increasing, decreasing or u-shaped. Our model is the first of its kind which can generate this result. Furthermore, we conclude that the level of the carbon tax should be positively adjusted to account for (i) damage uncertainty and (ii) the declining ability of the deep ocean to absorb atmospheric carbon.
In the second part of the thesis (Chapter 3) we apply standardized numerical techniques of stochastic optimization to the climate change issue. We ask the question how the optimal mitigation of climate change evolves if intrinsic uncertainty about damage is inherent to the model. In particular, we are interested in how the effect of uncertainty on climate change mitigation changes with
different levels of risk aversion.
A major finding is that the effects of stochasticity differ even in
sign as to emission control with varying parameters: introduction of
stochasticity may increase or decrease emission control depending on
the specific parameter setting. Our analysis covers a large range of
the parameter space, in particular the degree of risk aversion and
the level of uncertainty. We identify regions of the state space for
which higher levels of uncertainty or risk aversion result in
different policy rules for emission control. Similarly, given a
certain state of the world we conclude that the effect of
uncertainty on emission control changes (in level and sign) with the
degree of risk aversion. In other words, uncertainties in climatic
trends may induce people's precautionary emission reduction but also
may drive away money from abatement.
In the third part of the thesis (Chapter 4) we are interested in how
a capital stock which is linked to a polluting technology is
maintained, accumulated and utilized optimally. In order to analyze
the inter- and intra-sectoral tradeoffs between capacity building
and capacity using which guide the economy's transition process
towards a balanced growth equilibrium we develop a model with two
production sectors that generate a homogenous consumption good. The
production processes in these two sectors differ with respect to the
technology which is used. While in one sector the process is clean,
generating output in the other sector also creates environmental
damage. The technologies are completely embedded in the
corresponding stock of physical capital. Hence, the application of
one technology can only be intensified by investing more in the
associated capital stock or utilizing it more intensively.
Our findings show that the combination of heterogeneous capital,
endogenous depreciation and capital intensity is essential for
extracting qualitative and quantitative implications for policy
makers about the easiness of a technology switch. If the economic
environment requires a change in the energy portfolio, an economy
driven by our model structure can not react without severe time
lags, due to the ex post clay nature of investment. Installation of
the desired capital stock simply takes time if we do not want to
abstain from smooth consumption patterns. In a next step we
introduce a stock of carbon which is subject to uncertainty. With
this modification we can investigate how uncertainty about damage
resulting from climate change influences the optimal interplay
between capacity building and capacity utilization in a more
realistic environment. We conclude that increasing uncertainty
intensifies the need for a rapid build-up of the clean capital
stock. It also reduces the demand for effective capital services
associated with the polluting technology