The Risk-Adjusted Carbon Price
Ton S. van den Bremer, Frederick van der Ploeg
American Economic Review · 2021 · Volume 111 · Issue 9
Abstract
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.
Keywords
General Aggregative Models: Keynes, Keynesian, Post-Keynesian, Insurance, Insurance Companies, Actuarial Studies, Taxation and Subsidies: Externalities, Redistributive Effects, Environmental Taxes and Subsidies, Environment and Growth, Hydrocarbon Resources, Valuation of Environmental Effects, Climate, Natural Disasters and Their Management, Global Warming
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