Decomposing the Integrated Assessment of Climate Change

We present a decomposition approach for integrated assessment modeling of climate policy based on a linear approximation of the climate system. In our formulation the economic and natural science components are processed independently on different time scales. Turnpike properties of the Ramsey growth model can be exploited to provide a precise representation of post-terminal emissions and to reduce the economic horizon required to accurately approximate transition paths. Germaine to the economic assessment of climate policies, our decomposition accommodates formulation of the economic model in a complementarity format and thereby provides a means of incorporating second-best effects that are not easily represented in an optimization model. JEL classification: C61, C63, D58, D61 ∗We would like to thank two anonymous referees for their constructive suggestions on an earlier version of this paper. Financial support by the European Commision under the project “I.Q. Tools” is gratefully acknowledged. Rutherford also thanks the Electric Power Research Institute for support on climate policy research. The ideas expressed here remain those of the authors who remain solely responsible for errors and omissions. Corresponding author, Thomas F. Rutherford, [email protected].