When to bite the bullet? - A study of optimal strategies for reducing global warming

Research output: Chapter in Book/Report/Conference proceedingConference proceeding contribution

Abstract

This work is based on the framework proposed by Conrad (1997) to determine the optimal timing of an investment or policy to slow global warming. While Conrad (2007) formulated the problem as a stopping rule option pricing model, we treat the policy decision by considering the total damage function that enables us to make some interesting extensions to the original formulation. We show that Conrad's framework is equivalent to minmization of the expected value of the damage function under the stochastic optimal stopping rule. We extend Conrad's model by allowing for policy cost to grow. In addition to closed form solution, we also perform Monte Carlo simulations to find the distribution for the total damage and show that at higher quantiles the damage may become too large and so is the risk on the global economy. We also show that the decision to take action largely depends on the cost of the action - for example, if the cost increases with the same rate as the growth rate, then action has to be taken immediately to minimize the damage.
Original languageEnglish
Title of host publicationMODSIM 2013
Subtitle of host publicationProceedings of the 20th International Congress On Modelling And Simulation
EditorsJulia Piantadosi, Robert Anderssen, John Boland
Place of PublicationCanberra, ACT
PublisherModelling and Simulation Society of Australia and New Zealand
Pages1447-1453
Number of pages7
ISBN (Electronic)9780987214331
Publication statusPublished - 2013
Externally publishedYes
EventInternational Congress on Modelling and Simulation (20th : 2013) - Adelaide, SA
Duration: 1 Dec 20136 Dec 2013

Publication series

NameProceedings - 20th International Congress on Modelling and Simulation, MODSIM 2013

Conference

ConferenceInternational Congress on Modelling and Simulation (20th : 2013)
CityAdelaide, SA
Period1/12/136/12/13

    Fingerprint

Keywords

  • stochastic optimal stopping rule
  • global warming
  • Monte Carlo simulations

Cite this

Luo, X., & Shevchenko, P. V. (2013). When to bite the bullet? - A study of optimal strategies for reducing global warming. In J. Piantadosi, R. Anderssen, & J. Boland (Eds.), MODSIM 2013: Proceedings of the 20th International Congress On Modelling And Simulation (pp. 1447-1453). (Proceedings - 20th International Congress on Modelling and Simulation, MODSIM 2013). Canberra, ACT: Modelling and Simulation Society of Australia and New Zealand.