A Recursive Method for Solving a Climate–Economy Model: Value Function Iterations with Logarithmic Approximations

A recursive method for solving an integrated assessment model of climate and the economy is developed in this paper. The method approximates a value function with a logarithmic basis function and searches for solutions on a set satisfying optimality conditions. These features make the method suitable for a nonlinear model with many state variables and various constraints. The method produces exact solutions to a simple economic growth model and is useful for solving more demanding models such as the well-known DICE model (dynamic integrated model of climate and the economy).