The risk-adjusted carbon price

Tinbergen Institute Discussion Paper 2021-046/VI

91 Pages Posted: 25 May 2021

See all articles by Rick van der Ploeg

Rick van der Ploeg

University of Oxford - Department of Economics

Ton S. van den Bremer

University of Oxford - Department of Engineering Science

Multiple version iconThere are 2 versions of this paper

Date Written: April 30, 2021

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.

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

JEL Classification: H21, Q51, Q54

Suggested Citation

der Ploeg, Rick van and van den Bremer, Ton S., The risk-adjusted carbon price (April 30, 2021). Tinbergen Institute Discussion Paper 2021-046/VI, Available at SSRN: https://ssrn.com/abstract=3851906 or http://dx.doi.org/10.2139/ssrn.3851906

Rick van Der Ploeg (Contact Author)

University of Oxford - Department of Economics ( email )

10 Manor Rd
Oxford, OX1 3UQ
United Kingdom

Ton S. Van den Bremer

University of Oxford - Department of Engineering Science ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

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