The optimal choice of climate change policy in the presence of uncertainty

Considerable uncertainty surrounds both the consequences of climate change and their valuation over horizons of decades or centuries. Yet, there have been few attempts to factor such uncertainty into current policy decisions concerning stringency and instrument choice. This paper presents a framework for determining optimal climate change policy under uncertainty and compares the resulting prescriptions to those derived from a more typical analysis with best-guess parameter values. Uncertainty raises the optimal level of emission reductions and leads to a preference for taxes over rate controls. This suggests that analyses which ignore uncertainty can lead to inefficient policy recommendations. (C) 1999 Elsevier Science B.V. All rights reserved.