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

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

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 2985%. Changes in the mean SCCO2 due to the adjustments to the damage function alone range from a reduction of 7% to a rise of 12%. The combination of both leads to rises of 3315%. 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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File URL: http://dx.doi.org/10.5018/economics-ejournal.ja.2011-22
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File URL: http://econstor.eu/bitstream/10419/54199/1/682077380.pdf
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Article provided by Kiel Institute for the World Economy in its journal Economics: The Open-Access, Open-Assessment E-Journal.

Volume (Year): 5 (2011)
Issue (Month): ()
Pages: 1-29

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Handle: RePEc:zbw:ifweej:201122
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  1. Plambeck, Erica L. & Hope, Chris & Anderson, John, 1997. "The model: Integrating the science and economics of global warming," Energy Economics, Elsevier, vol. 19(1), pages 77-101, March.
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  9. Samuel Fankhauser, 1994. "The Social Costs of Greenhouse Gas Emissions: An Expected Value Approach," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 157-184.
  10. Ackerman, Frank & Stanton, Elizabeth A., 2011. "Climate risks and carbon prices: Revising the social cost of carbon," Economics Discussion Papers 2011-40, Kiel Institute for the World Economy.
  11. Ackerman, Frank & Stanton, Elizabeth A. & Hope, Chris & Alberth, Stephane, 2009. "Did the Stern Review underestimate US and global climate damages?," Energy Policy, Elsevier, vol. 37(7), pages 2717-2721, July.
  12. William D. Nordhaus, 2007. "A Review of the Stern Review on the Economics of Climate Change," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 686-702, September.
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