On optimal economic response to catastrophic climate change risks

We employ Optimal Control methods to analyze emission policies under risk of catastrophic climate change. Since the occurrence hazard is added to the social discount rate, the latter (i) increases and (ii) turns endogenous to the global warming policy. The second effect bears profound policy implications that are magnified by economic growth. In particular, it implies that greenhouse gases (GHG) emission should gradually be brought to a halt. Due to the public bad nature of the catastrophic risk, the second effect is ignored in a competitive allocation and unregulated economic growth will give rise to excessive emissions. We find that the GHG emission paths under the optimal and competitive growth regimes lie at the extreme ends of the range of feasible emissions. We derive the Pigouvian hazard tax that implements the optimal growth regime.