Pricing Carbon Under Economic and Climactic Risks: Leading-Order Results from Asymptotic Analysis
Ton van den Bremer and
Frederick (Rick) van der Ploeg ()
No 12642, CEPR Discussion Papers from C.E.P.R. Discussion Papers
Leading-order results from asymptotic analysis for the optimal price of carbon under uncertainty are derived from a macroeconomic continuous-time DSGE model with AK growth, energy use, adjustment costs, recursive utility and costs of global warming. We consider non-climatic productivity growth uncertainty, atmospheric carbon uncertainty, climate sensitivity uncertainty and climate damage uncertainty. Explicit expressions are derived that show the leading-order dependence of the optimal carbon price on these uncertainties, the various climate betas, risk aversion, intergenerational inequality aversion and convexity of the climate damage specification. Our solution allows for skewness and mean reversion in stochastic shocks to the climate sensitivity and damage coefficients. The resulting rule for the optimal risk-adjusted carbon price incorporates precautionary, risk-insurance and risk-exposure effects to deal with future economic and climatic risks. The stochastic processes are calibrated and used to estimate and interpret the impact of each source of uncertainty on the optimal risk-adjusted carbon price.
Keywords: climate betas; Insurance; mean reversion; precaution; Skewness (search for similar items in EconPapers)
JEL-codes: H21 Q51 Q54 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-ene, nep-env and nep-ias
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at email@example.com
Working Paper: Pricing Carbon Under Economic and Climatic Risks: Leading-Order Results from Asymptotic Analysis (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:12642
Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... rs/dp.php?dpno=12642
Access Statistics for this paper
More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().