Optimal carbon abatement under climate change and uncertainty

We develop a dynamic stochastic general equilibrium model that integrates climate change, climate damages, carbon abatement strategies, and model uncertainty. We adopt the perspective of a social planner who maximizes social welfare, balancing preferences for consumption and emissions while accounting for aversion to model misspecification. Through a comprehensive numerical analysis, we examine the dynamics of temperature change, the allocation between clean and dirty inputs, abatement expenditures, the social cost of carbon (SCC), the carbon tax, and the market price of risk. Our key findings indicate that climate model uncertainty leads to lower temperature changes, increased clean-input production, higher carbon abatement expenditures, and higher social costs of carbon and the carbon tax. Furthermore, we demonstrate that carbon abatement effectively reduces temperature change; it also leads to distinct temporal patterns in the SCC and the carbon tax, and to a higher price of temperature risk.