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Optimal Control of a Global Model of Climate Change with Adaptation and Mitigation.

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Why do governments in developing economies invest in roads and not enough in schools? In the presence of distortionary taxation and debt aversion, the different pace at which roads and schools contribute to economic growth turns out to be central to this decision. Specifically, while costs are front-loaded for both types of investment, the growth benefits of schools accrue with a delay. To put things in perspective, with a “big push,” even assuming a large (15 percent) return differential in favor of schools, the government would still limit the fraction of the investment scale-up going to schools to about a half. Besides debt aversion, political myopia also turns out to be a crucial determinant of public investment composition. A “big push,” by accelerating growth outcomes, mitigates myopia—but at the expense of greater risks to fiscal and debt sustainability. Tied concessional financing and grants can potentially mitigate the adverse effects of both debt aversion and political myopia.

Human capital. --- Public investments. --- Government investments --- Investments, Public --- Expenditures, Public --- Investments --- Capital budget --- Economic development projects --- Investment of public funds --- Human assets --- Human beings --- Human resources --- Capital --- Labor supply --- Finance --- Economic value --- Infrastructure --- Labor --- Public Finance --- Fiscal Policy --- International Lending and Debt Problems --- Debt --- Debt Management --- Sovereign Debt --- Institutions and Growth --- National Government Expenditures and Related Policies: Infrastructures --- Other Public Investment and Capital Stock --- Education: General --- Human Capital --- Skills --- Occupational Choice --- Labor Productivity --- Investment --- Intangible Capital --- Capacity --- Public finance & taxation --- Education --- Labour --- income economics --- Macroeconomics --- Public investment and public-private partnerships (PPP) --- Public investment spending --- Human capital --- Expenditure --- National accounts --- Public-private sector cooperation --- Public investments --- Saving and investment --- United States --- Income economics

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The Integrated Assessment Model (IAM) has extensively treated the adverse effects of climate change and the appropriate mitigation policy. We extend such a model to include optimal policies for mitigation, adaptation and infrastructure investment studying the dynamics of the transition to a low fossil-fuel economy. We focus on the adverse effects of increase in atmospheric CO2 concentration on households. Formally, the model gives rise to an optimal control problem of finite horizon consisting of a dynamic system with five-dimensional state vector consisting of stocks of private capital, green capital, public capital, stock of brown energy in the ground, and emissions. Given the numerous challenges to climate change policies the control vector is also five-dimensional. Our solutions are characterized by turnpike property and the optimal policy that accomplishes the objective of keeping the CO2 levels within bound is characterized by a significant proportion of investment in public capital going to mitigation in the initial periods. When initial levels of CO2 are high, adaptation efforts also start immediately, but during the initial period, they account for a smaller proportion of government's public investment.

Climatic changes --- Greenhouse gas mitigation. --- Abatement of greenhouse gas emissions --- Emission reduction, Greenhouse gas --- Emissions reduction, Greenhouse gas --- GHG mitigation --- Greenhouse gas abatement --- Greenhouse gas emission reduction --- Greenhouse gas emissions reduction --- Greenhouse gas reduction --- Mitigation of greenhouse gas emissions --- Reduction of greenhouse gas emissions --- Pollution prevention --- Economic aspects. --- Infrastructure --- Investments: Stocks --- Macroeconomics --- Environmental Economics --- Environmental Conservation and Protection --- Optimization Techniques --- Programming Models --- Dynamic Analysis --- Climate --- Natural Disasters and Their Management --- Global Warming --- Environmental Economics: Government Policy --- Pension Funds --- Non-bank Financial Institutions --- Financial Instruments --- Institutional Investors --- Investment --- Capital --- Intangible Capital --- Capacity --- Macroeconomics: Consumption --- Saving --- Wealth --- Climate change --- Investment & securities --- Stocks --- Greenhouse gas emissions --- Consumption --- Greenhouse gases --- Saving and investment --- Economics