The Risk-Adjusted Carbon Price | Zendy

Ton S. van den Bremer | Zendy; Frederick van der Ploeg | Zendy

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The Risk-Adjusted Carbon Price

Author(s) -

Ton S. van den Bremer,

Frederick van der Ploeg

Publication year - 2021

Publication title -

american economic review

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 16.936

H-Index - 297

eISSN - 1944-7981

pISSN - 0002-8282

DOI - 10.1257/aer.20180517

Subject(s) - 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 , philosophy , theology , political science , law , algorithm , electronic engineering , composite number , engineering

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)

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