Abstract
Abstract:
Climate policy is often seen as a timing problem: the choice between weaker action now versus stronger action later. We quantify the welfare cost of that delay in a stochastic climate asset-pricing model with Epstein-Zin preferences and endogenous learning-by-doing. Delay is costly because the climate and technology states continue to evolve, while policy is constrained. In our baseline calibration approximating optimal carbon prices of ∼$200/tCO2 in 2025, a ten-year delay produces consumption-equivalent deadweight losses (DWL) of ∼5% of annual consumption, corresponding to an annual compensation of roughly $∼4 trillion over the decade. Once policy is implemented, the planner raises carbon prices and mitigation, but cannot return to the prior path due to the accumulated carbon stock and forgone endogenous learning. Partial early mitigation has disproportionately high value in recovering lost welfare: allowing mitigation of up to 50% of baseline emissions avoids >90% of the no-action DWL for a ten-year delay. A Gaussian ensemble over preferences, technology, and growth rates shows median losses well below baseline estimates, pointing to a long right tail of delay costs. Welfare losses rise with continued delay: the probability that DWL exceeds 10% rises from ∼13% after a five-year delay to ∼18% after fifteen years. Stronger future policy mitigates but does not undo the costs of delay.
JEL: D62,G12,Q54
Keywords: Climate policy | Climate risk | Carbon pricing | Welfare economics | Policy delay
Significance statement:
Climate change is costly. Just how costly is the subject of many a study of optimal carbon prices, but those price paths themselves are poor indicators of the corresponding welfare costs. Higher climate damages increase prices, while innovation on carbon-cutting technologies lowers them. We here zero in on deadweight loss as a proxy for the welfare costs of delay and find enormous costs of even just a moderate delay of five or ten years, in a world that has been pushing off optimal climate policy for decades.