Lien Zoom.

This paper develops a dynamic model of climate policy adoption under two types of uncertainty. The first type captures gradual changes caused by accumulation of greenhouse gases. The second source of uncertainty are major environmental disasters that cause abrupt cuts to the consumption. Disasters arrive at jump times of a Poisson process of unknown intensity. Using a gamma distribution as a prior for the intensity, the model provides a transparent decision rule for policy timing. It offers an alternative to standard cost-benefit analysis by allowing for adaptive responses without relying on extreme assumptions about fat tails or low discount rates.