Risk Aversion, Time Preference, and the Social Cost of Carbon
AbstractThe Stern Review reported a social cost of carbon of over $300/tC, calling for ambitious climate policy. We here conduct a systematic sensitivity analysis of this result on two crucial parameters: the rate of pure time preference, and the rate of risk aversion. We show that the social cost of carbon lies anywhere in between 0 and $120,000/tC. However, if we restrict these two parameters to match observed behavior, an expected social cost of carbon of $60/tC results. If we correct this estimate for income differences across the world, the social cost of carbon rises to over $200/tC.
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Bibliographic InfoPaper provided by Economic and Social Research Institute (ESRI) in its series Papers with number WP252.
Length: 34 pages
Date of creation: Sep 2008
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-09-13 (All new papers)
- NEP-ENE-2008-09-13 (Energy Economics)
- NEP-ENV-2008-09-13 (Environmental Economics)
- NEP-UPT-2008-09-13 (Utility Models & Prospect Theory)
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