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Three Reasons to Price Carbon Under Uncertainty: Accuracy of Simple Rules

Author

Listed:
  • van den Bremer, Ton
  • Hambel, Christoph
  • van der Ploeg, Frederick

Abstract

An easy-to-interpret rule for the optimal risk-adjusted social cost of carbon is derived using perturbation analysis. This rule internalises the adverse effects of global warming on the risk of recurring climate-related disasters and the risk of irreversible climate tipping points as well as the usual adverse effect on total factor productivity. It approximates 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 rates corrected for growth and risk is not too small. The rule is also accurate if applied to models with a different supply side, e.g., with ongoing technical progress in fossil-fuel production or multiple economic sectors.

Suggested Citation

  • van den Bremer, Ton & Hambel, Christoph & van der Ploeg, Frederick, 2024. "Three Reasons to Price Carbon Under Uncertainty: Accuracy of Simple Rules," CEPR Discussion Papers 19645, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:19645
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    File URL: https://cepr.org/publications/DP19645
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    More about this item

    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
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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