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A tale of tails: Uncertainty and the social cost of carbon dioxide

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  • Pycroft, Jonathan
  • Vergano, Lucia
  • Hope, Chris
  • Paci, Daniele
  • Ciscar, Juan Carlos

Abstract

Recent thinking about the economics of climate change has concerned the uncertainty about the upper bound of both climate sensitivity to greenhouse gases and the damages that might occur at high temperatures. This argument suggests that the appropriate probability distributions for these factors may be fat-tailed. The matter of tail shape has important implications for the calculation of the social cost of carbon dioxide (SCCO2). In this paper a probabilistic integrated assessment model is adapted to allow for the possibility of a thin, intermediate or fat tail for both (i) the climate sensitivity parameter and (ii) the damage function exponent. Results show that depending on the tail shape of the climate sensitivity parameter the mean SCCO2 rises by 29 to 85 percent. Changes in the mean SCCO2 due to the adjustments to the damage function alone range from a reduction of 7 percent to a rise of 12 percent. The combination of both leads to rises of 33 to 115 percent. Greater rises occur for the upper percentiles of the SCCO2 estimates. Given the uncertainties in both the science and the economics of climate change different tail shapes deserve consideration due to their important implications for the range of possible values for the SCCO2. --

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Bibliographic Info

Paper provided by Kiel Institute for the World Economy in its series Economics Discussion Papers with number 2011-36.

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Date of creation: 2011
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Handle: RePEc:zbw:ifwedp:201136

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Keywords: Climate change; integrated assessment models; social cost of carbon dioxide; uncertainty;

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  1. Richard S.J. Tol, 2007. "The Social Cost Of Carbon: Trends, Outliers And Catastrophes," Working Papers, Research unit Sustainability and Global Change, Hamburg University FNU-144, Research unit Sustainability and Global Change, Hamburg University, revised Aug 2007.
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Cited by:
  1. Crost, Benjamin & Traeger, Christian P., 2013. "Optimal climate policy: Uncertainty versus Monte Carlo," Economics Letters, Elsevier, Elsevier, vol. 120(3), pages 552-558.
  2. In Hwang & Frédéric Reynès & Richard Tol, 2013. "Climate Policy Under Fat-Tailed Risk: An Application of Dice," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 56(3), pages 415-436, November.

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