Essays on economic decision making under climate risk

Abstract

Climate risk becomes a critical determinant in various economic decisions. This thesis covers topics that reflect the risk of climate change in several applications: (1) considering the impact of climate change on generation expansion plans (2) studying social discount rates that may reflect climate change scenarios (3) evaluating the final value of cooperation in coping with climate change. The first is to study long-term generation plan under the carbon emission limit. Unlike previous studies, my model is developed to expand the plant considering the flexibility of the energy source. We study the changes to plant expansion plans taking into account extreme accident costs. This model gives a guideline for the cost-effective policy to implement emission reduction to meet the accord’s standard. Next, we address the social discount rate issues necessary to evaluate such large projects. In particular, most social projects are long-term, and the assessment of social projects requires the creation of term-structure of a discount rate. However, previous studies assume a two-period model and are difficult to apply to real problems. We derive a multi-period social discount rate that could take into account the degree of consumption imbalance, risk and ambiguity averse. Based on these results, the methodology for deriving social discount rates is presented to reflect a given scenario of climate change. Finally, we study the problem of a transnational carbon tax. This problem compares the solution produced through international cooperation with the carbon tax proposed by social planners and non-cooperative solution to maximize the interests of individual countries. There are many different points of view when defining the socially optimal choice. We use the notion to maximize the members' interests with the lowest benefit (Egalitarian). Further, By performing numerical studies with the 2010 RICE model developed by Nordhaus, practical implications of our results are obtained. Through these different views, we discuss the transnational carbon tax by comparing cooperative and non-cooperative risks.