Strategic Behavior and the Environment > Vol 4 > Issue 3

Optimal Commitment Under Uncertainty: Adjustment Rules for Climate Policy

Michael Jakob, Mercator Research Institute on Global Commons and Climate Change (MCC), Germany, , Steffen Brunner, Potsdam Institute for Climate Impact Research, Germany
Suggested Citation
Michael Jakob and Steffen Brunner (2014), "Optimal Commitment Under Uncertainty: Adjustment Rules for Climate Policy", Strategic Behavior and the Environment: Vol. 4: No. 3, pp 291-310.

Publication Date: 11 Aug 2014
© 2014 M. Jakob and S. Brunner
Environmental economics,  Economic theory,  Regulation
Time-inconsistencyCommitmentAdjustment rule


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In this article:
1. Introduction 
2. Motivation and Theoretical Background 
3. Full, No, and Intermediate Commitment in a Deterministic Setting 
4. Commitment Under Uncertainty 
5. Implementing Adjustment Rules 
6. Conclusions 


This paper analyses the optimal type and degree of commitment to a future climate policy when damage costs from climate change are uncertain. Taking uncertainty into account, it is shown within the framework of a sequential game between firms and a regulator that commitment to an emission abatement target fails to achieve the first best optimal outcome. Though commitment to a future policy reduces the risk of time-inconsistency, it imposes costs in the form of reduced flexibility to respond to new information. If, however, the regulator commits to an adjustment rule that sets the abatement level contingent on the realization of the uncertain parameter, the first best optimal outcome can be obtained.