Article ID: | iaor20115448 |
Volume: | 213 |
Issue: | 2 |
Start Page Number: | 442 |
End Page Number: | 454 |
Publication Date: | Sep 2011 |
Journal: | European Journal of Operational Research |
Authors: | Baker Erin, Solak Senay |
Keywords: | energy |
Public policy response to global climate change presents a classic problem of decision making under uncertainty. Theoretical work has shown that explicitly accounting for uncertainty and learning in climate change can have a large impact on optimal policy, especially technology policy. However, theory also shows that the specific impacts of uncertainty are ambiguous. In this paper, we provide a framework that combines economics and decision analysis to implement probabilistic data on energy technology research and development (R&D) policy in response to global climate change. We find that, given a budget constraint, the composition of the optimal R&D portfolio is highly diversified and robust to risk in climate damages. The overall optimal investment into technical change, however, does depend (in a non‐monotonic way) on the risk in climate damages. Finally, we show that in order to properly value R&D, abatement must be included as a recourse decision.