Resource management has to take account of the possibility of regime shifts in the ecological system that provides the resource. Regime shifts are uncertain and lead to structural changes in the system dynamics, lowering the productivity of the resource. Optimal management is driven by two considerations. First, it becomes more precautionary in case a higher stock of the renewable resource decreases the hazard rate of…
Publication Keyword: precaution
Climate Tipping and Economic Growth: Precautionary Saving and the Social Cost of Carbon
The optimal reaction to a pending productivity shock of which the expected arrival time increases with global warming is to accumulate more precautionary capital to smooth consumption and to levy a carbon tax, proportional to the marginal hazard of a catastrophe, to curb the risk of climate change. The carbon tax holds down the stock of greenhouse gases, so that the risk of catastrophe decreases…
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