An Extended Integrated Assessment Model for Mitigation and Adaptation Policies on Climate Change

Abstract

We present an extended integrated assessment model (IAM) that explicitly solves for optimal climate financing policies. As with other IAMs, our approach ties economic activity with their externalities and feedback effects. We extend standard IAM methodologies to find the optimal allocation of infrastructure expenditure to carbon-neutral physical capital, climate change adaptation, and emissions mitigation. Optimal control solutions are obtained by discretizing the control problem and applying nonlinear programming methods. We demonstrate that the endogenously selected infrastructure shares out-perform fixed allocations by increasing consumption, private capital and tax revenue, while reducing public debt and CO2 emissions. We find 92–95% of spending should be allocated to physical infrastructure with the remainder going to mitigation and adaptation, for which the major part is used for adaptation. Further, homotopic analysis is conducted on unobservable parameters. We show that adaptation expenditure increases with the productive efficiency of non-renewables and emissions mitigation rises as its effect becomes nonlinear. The homotopic results demonstrate that our main findings are stable.