The Climate Risk Premium: How Uncertainty Affects the Social Cost of Carbon
University of Arizona Department of Economics Working Paper 15-01
54 Pages Posted: 4 Feb 2015 Last revised: 28 Jul 2017
Date Written: July 21, 2017
I analyze the marginal value of reducing greenhouse gas emissions (the "social cost of carbon") under uncertainty about warming, under uncertainty about how much warming reduces consumption, and under stochastic shocks to consumption growth. I theoretically demonstrate that each of these sources of uncertainty increases the social cost of carbon under conventional preferences. In a calibrated numerical implementation, uncertainty increases the social cost of carbon by 60%. Uncertainty about the consumption impacts of warming contributes the most to this premium, interacts strongly with uncertainty about warming, and makes the social cost of carbon sensitive to impacts in later centuries.
Keywords: climate, uncertainty, risk, insurance, precautionary saving, prudence, externality, emission, carbon
JEL Classification: E21, G12, H23, Q54, Q58
Suggested Citation: Suggested Citation