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The Agnostic's Response to Climate Deniers: Price Carbon!

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  • Rick Van der Ploeg
  • Armon Rezai

Abstract

With the election of President Trump, climate deniers moved from the fringes to the centre of global policy making and need to be addressed in policy-making. An agnostic approach to policy, based on Pascal’s wager, gives a key role to subjective prior probability beliefs about whether climate deniers are right. Policy makers that assign a 10% chance of climate deniers being correct set the global price on carbon to $19.1 per ton of emitted CO2 in 2020. Given that a non-denialist scientist making use of the DICE integrated assessment model sets the price at $21.1/tCO2, agnostics’ reflection of remaining scientific uncertainty leaves climate policy essentially unchanged. The robustness of an ambitious climate policy also follows from using the max-min or the min-max regret principle. Letting the coefficient of relative ambiguity aversion vary from zero corresponding to expected utility analysis to infinity corresponding to the max-min principle, it is possible to show how policy makers deal with fundamental climate model uncertainty when they are prepared to assign prior probabilities to different views of the world being correct. Allowing for a wide range of sensitivity exercises including damage uncertainty, it turns out that pricing carbon is the robust response under rising climate scepticism.

Suggested Citation

  • Rick Van der Ploeg & Armon Rezai, 2017. "The Agnostic's Response to Climate Deniers: Price Carbon!," OxCarre Working Papers 202, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  • Handle: RePEc:oxf:oxcrwp:202
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    3. Kornek, Ulrike & Klenert, David & Edenhofer, Ottmar & Fleurbaey, Marc, 2021. "The social cost of carbon and inequality: When local redistribution shapes global carbon prices," Journal of Environmental Economics and Management, Elsevier, vol. 107(C).
    4. Emanuel Kohlscheen & Richhild Moessner, 2022. "Changing Electricity Markets: Quantifying the Price Effects of Greening the Energy Matrix," Papers 2208.14650, arXiv.org.
    5. Lint Barrage, 2019. "The Nobel Memorial Prize for William D. Nordhaus," Scandinavian Journal of Economics, Wiley Blackwell, vol. 121(3), pages 884-924, July.
    6. Nelson, Tim & Pascoe, Owen & Calais, Prabpreet & Mitchell, Lily & McNeill, Judith, 2019. "Efficient integration of climate and energy policy in Australia’s National Electricity Market," Economic Analysis and Policy, Elsevier, vol. 64(C), pages 178-193.
    7. Richard S.J. Tol, 2021. "Estimates of the social cost of carbon have not changed over time," Working Paper Series 0821, Department of Economics, University of Sussex Business School.
    8. Arnaud Goussebaïle, 2022. "Democratic Climate Policies with Overlapping Generations," CER-ETH Economics working paper series 22/374, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    9. Peter von zur Muehlen, 2022. "Prices and Taxes in a Ramsey Climate Policy Model under Heterogeneous Beliefs and Ambiguity," Economies, MDPI, vol. 10(10), pages 1-56, October.
    10. Rising, James A. & Taylor, Charlotte & Ives, Matthew C. & Ward, Robert E.t., 2022. "Challenges and innovations in the economic evaluation of the risks of climate change," LSE Research Online Documents on Economics 114941, London School of Economics and Political Science, LSE Library.
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    12. John Hassler & Per Krusell & Conny Olovsson, 2021. "Presidential Address 2020: Suboptimal Climate Policy [“Climate Change Uncertainty Spillover in the Macroeconomy.”]," Journal of the European Economic Association, European Economic Association, vol. 19(6), pages 2895-2928.
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    More about this item

    Keywords

    climate model uncertainty; climate scepticism; robust climate policies; max-min; min-max regret; ambiguity aversion; DICE integrated assessment model;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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