The risk-adjusted carbon price

Ton S. van den Bremer, Frederick van der Ploeg

Research output: Contribution to journalArticleScientificpeer-review

17 Citations (Scopus)
325 Downloads (Pure)

Abstract

The social cost of carbon is the expected present value of damages from emitting one ton of carbon today. We use perturbation theory to derive an approximate tractable expression for this cost adjusted for climatic and economic risk. We allow for different aversion to risk and intertemporal fluctuations, skewness and dynamics in the risk distributions of climate sensitivity and the damage ratio, and correlated shocks. We identify prudence, insurance, and exposure effects, reproduce earlier analytical results, and offer analytical insights into numerical results on the effects of economic and damage ratio uncertainty and convex damages on the optimal carbon price.

Original languageEnglish
Pages (from-to)2782-2810
Number of pages29
JournalAmerican Economic Review
Volume111
Issue number9
DOIs
Publication statusPublished - 2021

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