Inderscience Publishers

Chapter 3: Uncertainty in economic models of optimal energy use

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In the economics of non-renewable resources, the problem of eating the cake when its size is unknown constitutes an essential feature of uncertainty. Such a model was proposed by Gilbert (1979) and he obtained results that were both illuminating and suggestive. The problem of consuming an exhaustible resource when there is ignorance about its size is analytically equivalent to the more recent problem of CO2, that is generating fossil fuel emissions when the critical CO2 budget (where irreversibly the damage becomes infinite) is uncertain. It is also interesting to note that activities that reduce uncertainty, such as exploration in the former problem, correspond to the use of research in the latter. We will convert Gilbert’s model to the new problem context and show, in a social planning framework, that the treatment of uncertainty has significant impacts on policy choices regarding global CO2 emission limits. We will support such conclusions by a numerical treatment of an optimal control model on fossil fuel use where uncertainty is a major subject of sensitivity analysis.

Keywords: economic modelling, energy modelling, CO2 emissions, greenhouse gases

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