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The treatment of risk and uncertainty in the US social cost of carbon for regulatory impact analysis

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  • Dietz, Simon
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    Abstract

    This note considers the treatment of risk and uncertainty in the recently established social cost of carbon (SCC) for analysis of federal regulations in the United States. It argues that the analysis of the US Interagency Working Group on Social Cost of Carbon did not go far enough into the tail of low-probability, high-impact scenarios, and, via its approach to discounting, it mis-estimated climate risk, possibly hugely. Given the uncertainty about estimating the SCC, the note concludes by arguing that there is in fact much to commend an approach whereby a quantitative, long-term emissions target is chosen, and the price of carbon for regulatory impact analysis is then based on estimates of the marginal cost of abatement to achieve that very target. --

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    Bibliographic Info

    Paper provided by Kiel Institute for the World Economy in its series Economics Discussion Papers with number 2011-30.

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    Date of creation: 2011
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    Handle: RePEc:zbw:ifwedp:201130

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    Keywords: Ambiguity; climate change; discounting; integrated assessment modelling; risk; social cost of carbon; uncertainty;

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    1. Martin L. Weitzman, 2009. "On Modeling and Interpreting the Economics of Catastrophic Climate Change," The Review of Economics and Statistics, MIT Press, vol. 91(1), pages 1-19, February.
    2. Antony Millner & Simon Dietz & Geoffrey Heal, 2010. "Ambiguity and climate policy," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 37595, London School of Economics and Political Science, LSE Library.
    3. Martin L. Weitzman, 2012. "GHG Targets as Insurance Against Catastrophic Climate Damages," Journal of Public Economic Theory, Association for Public Economic Theory, Association for Public Economic Theory, vol. 14(2), pages 221-244, 03.
    4. Hanemann, W. Michael, 2008. "What is the Economic Cost of Climate Change?," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series, Department of Agricultural & Resource Economics, UC Berkeley qt9g11z5cc, Department of Agricultural & Resource Economics, UC Berkeley.
    5. Ackerman, Frank & Stanton, Elizabeth A. & Bueno, Ramón, 2010. "Fat tails, exponents, extreme uncertainty: Simulating catastrophe in DICE," Ecological Economics, Elsevier, Elsevier, vol. 69(8), pages 1657-1665, June.
    6. Tol, Richard S. J., 2007. "The Social Cost of Carbon: Trends, Outliers and Catastrophes," Economics Discussion Papers 2007-44, Kiel Institute for the World Economy.
    7. Camerer, Colin & Weber, Martin, 1992. " Recent Developments in Modeling Preferences: Uncertainty and Ambiguity," Journal of Risk and Uncertainty, Springer, Springer, vol. 5(4), pages 325-70, October.
    8. Simon Dietz, 2011. "High impact, low probability? An empirical analysis of risk in the economics of climate change," Climatic Change, Springer, Springer, vol. 108(3), pages 519-541, October.
    9. Ackerman, Frank & Stanton, Elizabeth A., 2012. "Climate risks and carbon prices: Revising the social cost of carbon," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 6(10), pages 1-25.
    10. Hanemann, William Michael, 2008. "What is the economic cost of climate change?," CUDARE Working Paper Series, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy 1071, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
    11. Simon Dietz & Samuel Fankhauser, 2010. "Environmental prices, uncertainty, and learning," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 26(2), pages 270-284, Summer.
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