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The Risk-Adjusted Carbon Price

Frederick (Rick) van der Ploeg () and Ton S. Van den Bremer

No 203, OxCarre Working Papers from Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford

Abstract: A popular model of economy and climate change has logarithmic preferences and damages proportional to the carbon stock in which case the certainty-equivalent carbon price is optimal. We allow for different aversions to risk and intertemporal fluctuations, convex damages, uncertainties in economic growth, atmospheric carbon, climate sensitivity and damages, correlated risks, and distributions that are skewed in the longer run to capture climate feedbacks. We derive a non-certainty-equivalent rule for the carbon price, which incorporates precautionary, risk-insurance and risk-exposure, and climate beta effects to deal with future economic and climatic risks. We interpret these effects with a calibrated DSGE model.

Keywords: precaution; insurance; economic; climatic and damage uncertainties; skewness; mean reversion; climate betas; risk aversion; prudence; intergenerational inequality aversion; convex damages; DSGE (search for similar items in EconPapers)
JEL-codes: H21 Q51 Q54 (search for similar items in EconPapers)
Date: 2018-01-01
New Economics Papers: this item is included in nep-dge, nep-ene, nep-env and nep-upt
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Working Paper: The risk-adjusted carbon price (2019) Downloads
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