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Three reasons to price carbon under uncertainty: Accuracy of simple rules

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  • Ton van den Bremer
  • Christoph Hambel
  • Frederick van der Ploeg

Abstract

An easy‐to‐interpret rule for the optimal risk‐adjusted social cost of carbon is derived using perturbation analysis. This rule internalizes the adverse effects of global warming on the risk of recurring climate‐related disasters, the risk of irreversible cascading climate tipping points, and the usual effect on total factor productivity. It and its three components approximate the true numerical optimum well, especially if the small parameters (i.e., the share of damages in GDP, the sensitivity of the risk of disasters to temperature and the risk of climate tipping) are small enough and the discount rate is not too small. The rule is also accurate if applied to AK models with a different supply side, for example, with ongoing technical progress in fossil‐fuel production or multiple economic sectors. With a growth‐adjusted discount rate of 2%/year, the SCC is $172/tCO2, 70% of which is due to recurring climate disasters and 9% to climate tipping risk.

Suggested Citation

  • Ton van den Bremer & Christoph Hambel & Frederick van der Ploeg, 2026. "Three reasons to price carbon under uncertainty: Accuracy of simple rules," Quantitative Economics, Econometric Society, vol. 17(3), pages 858-894, July.
    • Handle: RePEc:wly:quante:v:17:y:2026:i:3:p:858-894
    DOI: 10.3982/QE2681
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