Three Reasons to Price Carbon Under Uncertainty: Accuracy of Simple Rules

Ton van den Bremer, Christoph Hambel and Frederick van der Ploeg

No 19645, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: An easy-to-interpret rule for the optimal risk-adjusted social cost of carbon is derived using perturbation analysis. This rule internalises the adverse effects of global warming on the risk of recurring climate-related disasters and the risk of irreversible climate tipping points as well as the usual adverse effect on total factor productivity. It approximates the true numerical optimum well, especially if the small parameters (i.e., the share of damages in GDP, the sensitivity of the risk of disasters to temperature and the risk of climate tipping) are small enough and the discount rates corrected for growth and risk is not too small. The rule is also accurate if applied to models with a different supply side, e.g., with ongoing technical progress in fossil-fuel production or multiple economic sectors.

JEL-codes: H21 Q5 Q51 (search for similar items in EconPapers)
Date: 2024-11
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