Using Control Theory to Design Sustainable Policies for Greenhouse Gas Emissions in the Presence of Model Uncertainty

This project will apply concepts from modern robust control theory to develop algorithms for determining the optimal policy that both achieves sustainable levels of emissions of CO2 (and other greenhouse gases) and minimises the impact on the economy, but also explicitly addresses the high levels of uncertainty associated with predictions of future emissions. The aim of the optimal policy is to adjust factors such as the mix of energy generation methods and policies for reducing emissions from housing, industry and transport, in order to achieve a rate of emissions that will allow the UK to achieve its emissions targets while maximising economic growth as measured by discounted GDP. A key difficulty in determining the optimal policy is handling the uncertainty associated with the effect that the policy changes will have on the rate at which is CO2 emitted. One of the main conclusions of the Stern Review is that policies for stabilisation of CO2 emissions have to be implemented immediately and it is not possible to delay decisions until models with less uncertainty become available. If this conclusion is accepted (and indeed even if it is not) model uncertainty has to be incorporated as an integral part of the design of these policies. Currently, economists are unable to find optimal policies in the presence of uncertainty and most existing economic models address model uncertainty by running repeated what if scenarios to predict the outcome for a range of parameter values. This project will use concepts from robust control theory to develop tools for incorporating uncertainty directly into the design of the optimal emissions policy; the tools can then be applied to other existing models. Including uncertainty within the design quantifies the risk associated with the emissions policy, which allows policy makers and emitters of CO2 to incorporate risk within their strategic plans. The tools will be implemented on the ECCO (Evolution of Capital Creation Options) model that describes the dynamic evolution of CO2 levels emitted by UK economy. Unlike many other economic models, this model is based on the physical principles of mass and energy balances, which are used to derive economic measures.

The main beneficiaries will be the UK Energy Industry and UK Government as the project will develop methodologies for determining a sustainable policy on the emission of greenhouse gases that will ensure that targets, such as those put forward in the Stern Review, will be achieved, while minimising the impact of the policy on economic activity. These targets can only be achieved if these appropriate policies can be identified and the outcomes of this research will feed directly into determining these policies. Although the research will focus on designing policies for emissions of greenhouse gases, the ideas developed will also be applicable to the design of sustainable policies for the harvesting of renewable resources such as forestry, fish stocks, water resources and land use for agriculture. The research will also benefit Ove Arup who are currently developing the ECCO model as tool for determining the growth potential of an economic system in response to different policies, environmental objectives and technology options. This project fits within the existing memorandum of understanding between EPSRC and Ove Arup to develop strategic partnerships for design and engineering in the built environment. An essential component of the project is to take the existing version of Ove Arup's model of the UK economy and to modify and extend it so that it can be used to determine optimal policies for emissions. As the model is developed, updated versions will be transferred back to Ove Arup. The main route for disseminating the outcomes of the research will be through the Smith School of Enterprise and the Environment at Oxford University, where one of the investigators (CH) is a Research Fellow. The Smith School was established in 2008 and aims to produce world-class research, generating a new body of knowledge on critical issues at the intersection of business, government, and the environment. It also seeks to enable and inform active dialogue with senior opinion-formers and policy-makers in the environmental field through its two regular seminar series that have speakers from both within and outside the University, including government and the private sector and through major events such as Forum on Enterprise and the Environment. The outcomes of research from this project will feed directly into the body of knowledge being developed at the Smith School, which will provide a direct route for bringing the results of the research to the attention of individuals and organisations who will be formulating emissions policies, as well as to the companies and organisations that will need to respond to these policies. In addition, to publicise the research to a wider audience, a project website will be established with the assistance of the External Relations Officer in the Department of Engineering Science and the Communications Officer in the Smith School.