Global warming and dynamic cost-benefit analysis under uncertainty: An economic analysis of forest carbon sequestration

This paper provides an economic analysis that integrates dynamic and stochastic features into the global warming problem. The aim is to provide a framework for analyzing alternative policy measures. We show in what sense a free-market solution is different from the first best command optimum, and we discuss an appropriate policy instrument to implement the first best solution. We also introduce a numerical model, and simulate the optimal path for consumption, GHG emissions, etc under different assumptions. It turns out that an endogenous discount rate, minimizing the probability of a doomsday scenario, leads to a more even consumption path, than the corresponding path under a lower and constant discount rate. 19 refs, 5 figs