Pricing Climate Risk

66 Pages Posted: 26 Jul 2021

See all articles by Svenn Jensen

Svenn Jensen

OsloMet - Oslo Metropolitan University

Christian P. Traeger

University of Oslo - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

Date Written: 2021

Abstract

Anthropogenic greenhouse gas emissions are changing the energy balance of our planet. Various climatic feedbacks make the resulting warming over the next decades and centuries highly uncertain. We quantify how this uncertainty changes the optimal carbon tax in a stochastic dynamic programming implementation of an integrated assessment model of climate change. We derive a general analytic formula for the “risk premium” governing the resulting climate policy. The formula generalizes simple precautionary savings analysis to more complex economic interactions and it builds the economic intuition for policy making under uncertainty. It clarifies the distinct roles of risk aversion, prudence, characteristics of the damage formulation, and future policy response. We show that an optimal response to uncertainty substantially reduces the risk premium.

JEL Classification: Q540, Q000, D900, C630

Suggested Citation

Jensen, Svenn and Traeger, Christian P., Pricing Climate Risk (2021). Available at SSRN: https://ssrn.com/abstract=3892620 or http://dx.doi.org/10.2139/ssrn.3892620

Svenn Jensen (Contact Author)

OsloMet - Oslo Metropolitan University ( email )

P.O. Box 4
Oslo, 0130
Norway

Christian P. Traeger

University of Oslo - Department of Economics ( email )

Norway

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 01069
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
138
Abstract Views
444
rank
269,587
PlumX Metrics