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The Social Cost of Stochastic and Irreversible Climate Change

  • Yongyang Cai
  • Kenneth L. Judd
  • Thomas S. Lontzek

There is great uncertainty about the impact of anthropogenic carbon on future economic wellbeing. We use DSICE, a DSGE extension of the DICE2007 model of William Nordhaus, which incorporates beliefs about the uncertain economic impact of possible climate tipping events and uses empirically plausible parameterizations of Epstein-Zin preferences to represent attitudes towards risk. We find that the uncertainty associated with anthropogenic climate change imply carbon taxes much higher than implied by deterministic models. This analysis indicates that the absence of uncertainty in DICE2007 and similar models may result in substantial understatement of the potential benefits of policies to reduce GHG emissions.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18704.

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Date of creation: Jan 2013
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Handle: RePEc:nbr:nberwo:18704
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