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

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  • Rezai, Armon
  • van der Ploeg, Frederick

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

  • Rezai, Armon & van der Ploeg, Frederick, 2017. "The Agnostic's Response to Climate Deniers: Price Carbon!," CEPR Discussion Papers 12468, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12468
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    Cited by:

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    2. Lint Barrage, 2019. "The Nobel Memorial Prize for William D. Nordhaus," Scandinavian Journal of Economics, Wiley Blackwell, vol. 121(3), pages 884-924, July.
    3. 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.
    4. Monasterolo, Irene & Roventini, Andrea & Foxon, Tim J., 2019. "Uncertainty of climate policies and implications for economics and finance: An evolutionary economics approach," Ecological Economics, Elsevier, vol. 163(C), pages 177-182.
    5. Andri Brenner, 2021. "The Social Power of Spillover Effects: Educating Against Environmental Externalities," CEPA Discussion Papers 35, Center for Economic Policy Analysis.
    6. Michael D. Bauer & Glenn D. Rudebusch, 2020. "The Rising Cost of Climate Change: Evidence from the Bond Market," Working Paper Series 2020-25, Federal Reserve Bank of San Francisco.
    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.

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    More about this item

    Keywords

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