A tale of tails: Uncertainty and the social cost of carbon dioxide

Jonathan Pycroft, Lucia Vergano, Chris Hope, Daniele Paci and Juan-Carlos Ciscar

No 2011-36, Economics Discussion Papers from Kiel Institute for the World Economy (IfW Kiel)

Abstract: Recent thinking about the economics of climate change has concerned the uncertainty about the upper bound of both climate sensitivity to greenhouse gases and the damages that might occur at high temperatures. This argument suggests that the appropriate probability distributions for these factors may be fat-tailed. The matter of tail shape has important implications for the calculation of the social cost of carbon dioxide (SCCO2). In this paper a probabilistic integrated assessment model is adapted to allow for the possibility of a thin, intermediate or fat tail for both (i) the climate sensitivity parameter and (ii) the damage function exponent. Results show that depending on the tail shape of the climate sensitivity parameter the mean SCCO2 rises by 29 to 85 percent. Changes in the mean SCCO2 due to the adjustments to the damage function alone range from a reduction of 7 percent to a rise of 12 percent. The combination of both leads to rises of 33 to 115 percent. Greater rises occur for the upper percentiles of the SCCO2 estimates. Given the uncertainties in both the science and the economics of climate change different tail shapes deserve consideration due to their important implications for the range of possible values for the SCCO2.

Keywords: Climate change; integrated assessment models; social cost of carbon dioxide; uncertainty (search for similar items in EconPapers)
JEL-codes: Q54 (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-ene and nep-env
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Citations: View citations in EconPapers (12)

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Journal Article: A tale of tails: Uncertainty and the social cost of carbon dioxide (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwedp:201136

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