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Determining the Social Cost of Carbon: Under Damage and Climate Sensitivity Uncertainty

  • Samuel Jovan OkulloEmail author
Article

Abstract

This article quantifies the impact on optimal climate policy, of both damage elasticity and equilibrium climate sensitivity uncertainty, under separable preferences for risk and intergenerational inequality. The primary findings are as follows. (1) Such preferences can depress the social cost of carbon (SCC) when calibration aims at matching actual economic outcomes, countering the prevailing view that the SCC is greater with separable than with conventional entangled preferences. (2) Damage elasticity uncertainty has larger effects on climate policy than equilibrium climate sensitivity uncertainty, even under high impact tail risk of the latter. (3) Risk aversion decisively strengthens optimal climate policy under joint damage and climate sensitivity uncertainty, than with a single source of uncertainty alone. Indeed, failing to account for the interaction between damage and climate sensitivity uncertainty underestimates the cost of climate change by more than US dollars 1 trillion.

Keywords

Social cost of carbon (SCC) Epstein–Zin–Weil preferences DICE Climate change Risk aversion 

Notes

Acknowledgements

The article benefited immensely from comments by two reviewers and the editor (David Popp). Additional comments received at the World Congress of Environmental and Resource Economists are appreciated.

Supplementary material

10640_2019_389_MOESM1_ESM.pdf (36 kb)
Supplementary material 1 (pdf 36 KB)

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Copyright information

© Springer Nature B.V. 2019

Authors and Affiliations

  1. 1.School of Business AdministrationZhongnan University of Economics and LawWuhanChina
  2. 2.Member of the Leibniz AssociationPotsdam Institute for Climate Impact Research (PIK)PotsdamGermany

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