The Risk-Adjusted Carbon Price

79 Pages Posted: 19 Apr 2019

See all articles by Ton S. van den Bremer

Ton S. van den Bremer

University of Oxford - Department of Engineering Science

Rick van der Ploeg

University of Oxford

Multiple version iconThere are 2 versions of this paper

Date Written: 2019

Abstract

We use perturbation methods to derive a rule for the optimal risk-adjusted social cost of carbon (SCC) that incorporates the effects of uncertainties associated with climate and the economy from a calibrated DSGE model. We allow for different aversions to risk and intertemporal fluctuations, convex damages, uncertainties in economic growth, atmospheric carbon, climate sensitivity and damages, their correlations, and distributions that are skewed in the longer run to capture long-run climate feedbacks. Our non-certainty-equivalent rule for the SCC incorporates precaution, risk insurance, and climate sensitivity and damage rate hedging effects to deal with future economic and climatic and damage risks.

Keywords: precaution, insurance, hedging, economic, climatic and damage uncertainties, skewness, mean reversion, correlated risks, risk aversion, intergenerational inequality aversion, convex damages

JEL Classification: H210, Q510, Q540

Suggested Citation

van den Bremer, Ton S. and van der Ploeg, Frederick, The Risk-Adjusted Carbon Price (2019). CESifo Working Paper No. 7592, Available at SSRN: https://ssrn.com/abstract=3374584 or http://dx.doi.org/10.2139/ssrn.3374584

Ton S. Van den Bremer (Contact Author)

University of Oxford - Department of Engineering Science ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

Frederick Van der Ploeg

University of Oxford ( email )

Manor Road Building
Manor Road
Oxford, OX1 3BJ
United Kingdom

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