Mitigating global warming: a real options approach

Mitigation and adaptation represent two solutions to the issue of global warming. While mitigation aims at reducing ${\text{CO}}_2$ emissions and preventing climate change, adaptation encompasses a broad scope of techniques used to reduce the impacts of climate change once they have occurred. Both have direct costs on a country’s gross domestic product, but costs also arise from temperature increases due to inaction. This paper introduces a tipping point in a real options model and analyzes optimal investment choices in mitigation and their timing.