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The Social Cost of Stochastic and Irreversible Climate Change

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  • Yongyang Cai
  • Kenneth L. Judd
  • Thomas S. Lontzek

Abstract

There is great uncertainty about the impact of anthropogenic carbon on future economic wellbeing. We use DSICE, a DSGE extension of the DICE2007 model of William Nordhaus, which incorporates beliefs about the uncertain economic impact of possible climate tipping events and uses empirically plausible parameterizations of Epstein-Zin preferences to represent attitudes towards risk. We find that the uncertainty associated with anthropogenic climate change imply carbon taxes much higher than implied by deterministic models. This analysis indicates that the absence of uncertainty in DICE2007 and similar models may result in substantial understatement of the potential benefits of policies to reduce GHG emissions.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18704.

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Date of creation: Jan 2013
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Handle: RePEc:nbr:nberwo:18704

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Cited by:
  1. Michael Keen & Ian Parry & Jon Strand, 2013. "Planes, ships and taxes: charging for international aviation and maritime emissions," Economic Policy, CEPR & CES & MSH, vol. 28(76), pages 701-749, October.
  2. Svenja Hector(), . "Accounting for Different Uncertainties: Implications for Climate Investments?," Working Papers ETH-RC-13-007, ETH Zurich, Chair of Systems Design.
  3. Reyer Gerlagh & Matti Liski, 2014. "Carbon Prices for the Next Hundred Years," CESifo Working Paper Series 4671, CESifo Group Munich.
  4. Carolyn Fischer & Garth Heutel, 2013. "Environmental Macroeconomics: Environmental Policy, Business Cycles, and Directed Technical Change," Annual Review of Resource Economics, Annual Reviews, vol. 5(1), pages 197-210, 06.
  5. Antoine Bommier & Bruno Lanz & Stéphane Zuber, 2014. "Models-as-Usual for Unusual Risks? On the Value of Catastrophic Climate Change," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00973491, HAL.
  6. Robert S. Pindyck, 2013. "Climate Change Policy: What Do the Models Tell Us?," Journal of Economic Literature, American Economic Association, vol. 51(3), pages 860-72, September.
  7. Antoine Bommier & Bruno Lanz & Stéphane Zuber, 2014. "Fair management of social risk," Documents de travail du Centre d'Economie de la Sorbonne 14017, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  8. Robert J. Barro, 2013. "Environmental Protection, Rare Disasters, and Discount Rates," NBER Working Papers 19258, National Bureau of Economic Research, Inc.
  9. Svenja Hector, 2013. "Accounting for Different Uncertainties: Implications for Climate Investments?," Working Papers 2013.107, Fondazione Eni Enrico Mattei.

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