TY - JOUR
T1 - The risk-adjusted carbon price
AU - van den Bremer, Ton S.
AU - van der Ploeg, Frederick
PY - 2021
Y1 - 2021
N2 - 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.
AB - 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.
UR - http://www.scopus.com/inward/record.url?scp=85107996864&partnerID=8YFLogxK
U2 - 10.1257/aer.20180517
DO - 10.1257/aer.20180517
M3 - Article
AN - SCOPUS:85107996864
SN - 0002-8282
VL - 111
SP - 2782
EP - 2810
JO - American Economic Review
JF - American Economic Review
IS - 9
ER -