We present a decomposition approach for integrated assessment modeling of climate policy based on a linear approximation of the climate system. Our objective is to demonstrate the usefulness of decomposition for integrated assessment models posed in a complementarity format. First, the complementarity formulation cum decomposition permits a precise representation of post-terminal damages thereby substantially reducing the model horizon required to produce an accurate approximation of the infinite-horizon equilibrium. Second, and central to the economic assessment of climate policies, the complementarity approach provides a means of incorporating second-best effects that are not easily represented in an optimization model.
Böhringer, Christoph, Andreas Löschel and Thomas F. Rutherford (2005), Decomposing Integrated Assessment of Climate Change, ZEW Discussion Paper No. 05-07, Mannheim. Download