Work in Progress
• Jensen, Svenn; Traeger, Christian (2025). Structure, shocks, and speed: Learning’s impact on optimal climate policy.
This study explores how learning affects optimal economic policy-making, focusing on climate policy. Dynamic economic models with uncertainty depend on how agents anticipate and adapt to new information. We show that seemingly similar approaches to modeling learning can lead to very different risk premiums in policy decisions. Our analysis focuses on the uncertain climate sensitivity, the temperature response to greenhouse gas accumulation. We distinguish two uncertainty components: natural temperature variability and subjective uncertainty about nature's true climate sensitivity. We provide an analytic formula for optimal carbon pricing under anticipated Bayesian learning. Whereas a decreasing variance over time reduces the risk premium, we show that learning's impact on the prior mean (``updating shocks'') has an opposing effect. We explore these two different channels and different model variations in a stochastic dynamic programming version of Nordhaus' DICE model, exploring the trade-off between a ``wait-and-see'' argument and a more cautious approach.
• Jensen, Svenn; Traeger, Christian (2025). Pricing an uncertain climate.
Anthropogenic climate change is subject to a multitude of highly uncertain feedback processes making the long-run impact of current emissions also highly uncertain. At present, we cannot reliably quantify the likelihood of differing global warming scenarios. Decision theory distinguishes between known, quantifiable risks and situations of ambiguity or deep uncertainty. A fully rational decision maker can respond differently to ambiguity and to risk, and real-world decision makers frequently do. We show how aversion to ambiguity affects optimal climate policy in an integrated assessment of climate change. We derive an analytic social cost of carbon formula for an ambiguity averse decision maker in a generic integrated assessment model. We also quantify the impact of recursive smooth ambiguity aversion for a stochastic dynamic programming implementation of DICE. Previous and paralleling approaches suggest substantial ambiguity premia on the optimal carbon tax. Our results show that the ambiguity premium is very small and optimal policy deriving from the standard Bayesian model is robust to ambiguity concerns under moderately large ambiguity aversion if climate policy is endogenous and policy makers have rational foresight.
Working Papers
• Jensen, Svenn; Traeger, Christian (2021). Pricing Climate Risk. CESifo Working Paper No. 9196. http://dx.doi.org/10.2139/ssrn.3892620
Climatic feedbacks imply that the warming from anthropogenic greenhouse gas emissions is highly uncertain. We derive a general analytic formula for the risk premium on the social cost of carbon. A base version characterizes the uncertainty channels when using a Monte Carlo approach, the US government’s method of choice. This approach implicitly assumes that future policy makers cannot respond to future observations. Extending the base model, we show how future policy response reduces the risk premium. The formula generalizes simple precautionary savings analysis to complex economic interactions. It clarifies the distinct roles of risk aversion, prudence, production vulnerabilities, and future policy response.
• Jensen, Svenn; Traeger, Christian (2013). Optimally Climate Sensitive Policy under Uncertainty and Learning. Job Market Paper. Unpublished working paper.
Published Work
• Jensen, Svenn; Traeger, Christian (2024). Uncertainty in climate-economic modeling. In: Barrage, Lint; Hsiang, Solomon M. (Ed.). Handbook of the Economics of Climate Change. p. 351-423. Elsevier. https://doi.org/10.1016/bs.hesecc.2024.10.005
• Jensen, Svenn; Mohlin, Kristina; Pittel, Karen; Sterner, Thomas (2015). An introduction to the green paradox: The unintended consequences of climate policies. Review of Environmental Economics and Policy. Vol. 9. https://doi.org/10.1093/reep/rev010
• Jensen, Svenn; Traeger, Christian (2014). Optimal climate change mitigation under long-term growth uncertainty: Stochastic integrated assessment and analytic findings. European Economic Review. Vol. 69. https://doi.org/10.1016/j.euroecorev.2014.01.008
• Hoel, Michael; Jensen, Svenn (2012). Cutting costs of catching carbon - Intertemporal effects under imperfect climate policy. 16 p. Resource and Energy Economics. Vol. 34 https://doi.org/10.1016/j.reseneeco.2012.07.001
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