The threat of climate change due to man-made emissions of greenhouse gases has motivated considerable interest in government policies to reduce or stabilize these emissions. At the same time, it has been argued that such policies have the potential to wreak havoc on the economy and should therefore be postponed until more is known about the mechanism and consequences of climate change. The essence of these conflicting positions is uncertainty about the cost of reducing emissions, uncertainty about the benefits associated with those reductions, and the best course of action to balance the two. This project seeks to identify optimal responses to threat of climate change in the presence of uncertainty about both costs and benefits. The first part of this research program develops an integrated model of the global economy and climate that incorporates uncertainty about both. Not only are uncertain outcomes modeled, but a consistent scheme for comparing these outcomes across policies is developed. The second part of the program uses the model and evaluation scheme to analyze different policies -- in particular, taxes and permits -- to determine which alternatives do the best job of balancing uncertain costs and benefits. While existing economic theory predicts a difference in efficiency between tax and permit policies in the presence of uncertain costs, it provides little practical guidance concerning the scale or direction of this difference. Simulations of the integrated climate-economy model, however, will generate an empirical estimate of this difference. In addition to advancing the methodology of policy simulation and evaluation under uncertainty, the resulting analyses can be used by policymakers to make more informed decisions about how to best combat climate change.
