Handbook on Energy and Climate Change
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Handbook on Energy and Climate Change

Edited by Roger Fouquet

This timely Handbook reviews many key issues in the economics of energy and climate change, raising new questions and offering solutions that might help to minimize the threat of energy-induced climate change.
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Chapter 18: State-contingent pricing as a response to uncertainty in climate policy

Ross McKitrick


Suppose we have a time machine that allows us to visit the year 2040 just long enough to collect some climate data. Figure 18.1 shows the post-1979 globally averaged lower tropospheric air temperature anomaly averaged over the two satellite series developed by, respectively, Spencer and Christy (1990) and Mears and Wentz (2005). This is only one of many data series people use to try to represent the global climate as a univariate time series, but it will do for the current illustration. Figure 18.1 shows the observed data from 1979 up to the end of 2010 (shown by the vertical line), and then runs the series forward using assumed trends and random numbers to conjecture two quite different futures. In the circles the next three decades exhibit continued variability but no upward trend, and even a slight downward trend. The squares show variability and a strong upward trend. Now suppose that, given an identical future greenhouse gas emissions trajectory, the data we collect in 2040 will look like one of those two paths. If we could find out which one would be observed, would it affect today’s policy choices?

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