A Multi-Capital Model of Climate Change, Innovation, and Uncertainty
Michael Barnett, Arizona State University
Joint work with William Brock (University of Wisconsin), Lars Hansen (University of Chicago), Ruimeng Hu (UC Santa Barbara), and Joseph Huang (University of Pennsylvania)
We study the implications of model uncertainty in a climate-economics setting with three types of capital: ``dirty'' capital that produces carbon emissions when used for production, ``clean'' capital that generates no emissions but is initially less productive than dirty, and knowledge capital that increases with R&D investment and can lead to technological innovation in green sector productivity. To solve our high-dimensional, non-linear model framework we implement a neural-network-based global solution method. We show that there are first-order impacts of model uncertainty on optimal decisions and social valuations in this integrated climate-economic-innovation framework. Specifically, accounting for interconnected uncertainty over climate dynamics, economic damages from climate change, and the arrival of a green technological change leads to important adjustments to investment in green capital and R&D investment in anticipation of potential technological change and the revelation of climate damage severity.