The risk-adjusted carbon price

Frederick (Rick) van der Ploeg and Ton van den Bremer

No 21-046/VI, Tinbergen Institute Discussion Papers from Tinbergen Institute

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: precaution; insurance; exposure; economic and climatic and damage uncertainties; skewness; mean reversion; correlated risks; risk aversion; intergenerational inequality aversion; convex damages (search for similar items in EconPapers)
JEL-codes: H21 Q51 Q54 (search for similar items in EconPapers)
Date: 2021-05-24
New Economics Papers: this item is included in nep-ene, nep-env, nep-ias and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (34)

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Related works:
Journal Article: The Risk-Adjusted Carbon Price (2021)
Working Paper: The risk-adjusted carbon price (2019)
Working Paper: The Risk-Adjusted Carbon Price (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20210046

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