The risk-adjusted carbon price

Journal article

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.

Files:: Bremer_and Ploeg_2021_The_risk_adjusted.pdf

(Preview, Accepted manuscript, pdf, 3.4MB, Terms of use)

Language:: English
Keywords:: climatic and damage uncertainties

insurance

convex damages

risk aversion

skewness

FFR

precaution

intergenerational inequality aversion

economic

correlated risks

mean reversion

exposure
Pubs id:: 1172707
Local pid:: pubs:1172707
Deposit date:: 2021-04-21

Copyright holder:: American Economic Association
Notes:: This is the accepted manuscript version of the article. The final version is available online from the American Economic Association at: https://doi.org/10.1257/aer.20180517

Licence:: Terms and Conditions of Use for Oxford University Research Archive

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