The risk-adjusted carbon price

Arbeitspapier

The social cost of carbon is the expected present value of damages from emitting one ton of carbon today. We use perturbation theory to derive an approximate tractable expression for this cost adjusted for climatic and economic risk. We allow for different aversion to risk and intertemporal fluctuations, skewness and dynamics in the risk distributions of climate sensitivity and the damage ratio, and correlated shocks. We identify prudence, insurance, and exposure effects, reproduce earlier analytical results, and offer analytical insights into numerical results on the effects of economic and damage ratio uncertainty and convex damages on the optimal carbon price.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Tinbergen Institute Discussion Paper ; No. TI 2021-046/VI

Classification and Topics

• Classification: Wirtschaft ; Taxation and Subsidies: Efficiency; Optimal Taxation ; Valuation of Environmental Effects ; Climate; Natural Disasters and Their Management; Global Warming
• Subject: precaution ; insurance ; exposure ; economic and climatic and damage uncertainties ; skewness ; mean reversion ; correlated risks ; risk aversion ; intergenerational inequality aversion ; convex damages

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): van der Ploeg, Rick ; van den Bremer, Ton
• Event: Veröffentlichung
• (who): Tinbergen Institute
• (where): Amsterdam and Rotterdam
• (when): 2021

Further information

• Handle: http://hdl.handle.net/10419/237779
• Last update: 10.03.2025, 11:44 AM CET