Social Cost of Carbon Under Stochastic Tipping Points

Nicolas Taconet (), Céline Guivarch and Antonin Pottier
Additional contact information
Nicolas Taconet: CIRED

Environmental & Resource Economics, 2021, vol. 78, issue 4, No 7, 709-737

Abstract: Abstract Is climate change concerning because of its expected damages, or because of the risk that damages could be very high? Climate damages are uncertain, in particular they depend on whether the accumulation of greenhouse gas emissions will trigger a tipping point. In this article, we investigate how much risk contributes to the Social Cost of Carbon in the presence of a tipping point inducing a higher-damage regime. To do so, we decompose the effect of a tipping point as an increase in expected damages plus a zero-mean risk on damages. First, using a simple analytical model, we show that the social cost of carbon (SCC) is primarily driven by expected damages, while the effect of pure risk is only of second order. Second, in a numerical experiment using a stochastic Integrated Assessment Model, we show that expected damages account for most of the SCC when the tipping point induces a productivity shock lower than 10%, the high end of the range commonly used in the literature. It takes both a large productivity shock and high risk aversion for pure risk to significantly contribute to the SCC. Our analysis suggests that the risk aversion puzzle, which is the usual finding that risk aversion has a surprisingly little effect on the SCC, occurs since the SCC is well estimated using expected damages only. However, we show that the risk aversion puzzle does not hold for large productivity shocks, as pure risk greatly contributes to the SCC in these cases.

Keywords: Climate change; Tipping points; Expected utility; Integrated Assessment Models; Risk; Social Cost of Carbon (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://link.springer.com/10.1007/s10640-021-00549-x Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:enreec:v:78:y:2021:i:4:d:10.1007_s10640-021-00549-x

Ordering information: This journal article can be ordered from
http://www.springer. ... al/journal/10640/PS2

DOI: 10.1007/s10640-021-00549-x

Access Statistics for this article

Environmental & Resource Economics is currently edited by Ian J. Bateman

More articles in Environmental & Resource Economics from Springer, European Association of Environmental and Resource Economists Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().