### 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 language | English |
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Title of host publication | MODSIM 2013 |

Subtitle of host publication | Proceedings of the 20th International Congress On Modelling And Simulation |

Editors | Julia Piantadosi, Robert Anderssen, John Boland |

Place of Publication | Canberra, ACT |

Publisher | Modelling and Simulation Society of Australia and New Zealand |

Pages | 1447-1453 |

Number of pages | 7 |

ISBN (Electronic) | 9780987214331 |

Publication status | Published - 2013 |

Externally published | Yes |

Event | International Congress on Modelling and Simulation (20th : 2013) - Adelaide, SA Duration: 1 Dec 2013 → 6 Dec 2013 |

### Publication series

Name | Proceedings - 20th International Congress on Modelling and Simulation, MODSIM 2013 |
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### Conference

Conference | International Congress on Modelling and Simulation (20th : 2013) |
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City | Adelaide, SA |

Period | 1/12/13 → 6/12/13 |

### Keywords

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

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## 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.