The Risk-Adjusted Carbon Price Article Swipe

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Prudence Damages Economics Skewness Econometrics Social cost Carbon price Risk aversion (psychology) Sensitivity (control systems) Carbon fibers Value (mathematics) Mathematics Climate change Statistics Expected utility hypothesis Microeconomics Mathematical economics Biology Ecology Political science Composite number Philosophy Theology Law Engineering Algorithm Electronic engineering

Ton S. van den Bremer , Frederick van der Ploeg ·

YOU? · · 2021 · Open Access · · DOI: https://doi.org/10.1257/aer.20180517 · OA: W3196983488

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. (JEL E12, G22, H23, O44, Q35, Q51, Q54)