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The treatment of risk and uncertainty in the US social cost of carbon for regulatory impact analysis

  • Dietz, Simon
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    This note considers the treatment of risk and uncertainty in the recently established social cost of carbon (SCC) for analysis of federal regulations in the United States. It argues that the analysis of the US Interagency Working Group on Social Cost of Carbon did not go far enough into the tail of low-probability, high-impact scenarios, and, via its approach to discounting, it mis-estimated climate risk, possibly hugely. Given the uncertainty about estimating the SCC, the note concludes by arguing that there is in fact much to commend an approach whereby a quantitative, long-term emissions target is chosen, and the price of carbon for regulatory impact analysis is then based on estimates of the marginal cost of abatement to achieve that very target.

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    File URL: http://www.economics-ejournal.org/economics/discussionpapers/2011-30
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    File URL: http://econstor.eu/bitstream/10419/48829/1/665570996.pdf
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    Paper provided by Kiel Institute for the World Economy in its series Economics Discussion Papers with number 2011-30.

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    Date of creation: 2011
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    Handle: RePEc:zbw:ifwedp:201130
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    1. Ackerman, Frank & Stanton, Elizabeth A., 2012. "Climate risks and carbon prices: Revising the social cost of carbon," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 6, pages 1-25.
    2. Martin L. Weitzman, 2010. "GHG Targets as Insurance Against Catastrophic Climate Damages," NBER Working Papers 16136, National Bureau of Economic Research, Inc.
    3. Tol, Richard S. J., 2008. "The Social Cost of Carbon: Trends, Outliers and Catastrophes," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 2, pages 1-22.
    4. Antony Millner & Simon Dietz & Geoffrey Heal, 2010. "Ambiguity and climate policy," GRI Working Papers 24, Grantham Research Institute on Climate Change and the Environment.
    5. Weitzman, Martin L., 2009. "On Modeling and Interpreting the Economics of Catastrophic Climate Change," Scholarly Articles 3693423, Harvard University Department of Economics.
    6. Hanemann, William Michael, 2008. "What is the economic cost of climate change?," CUDARE Working Paper Series 1071, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
    7. Simon Dietz & Samuel Fankhauser, 2010. "Environmental prices, uncertainty, and learning," Oxford Review of Economic Policy, Oxford University Press, vol. 26(2), pages 270-284, Summer.
    8. Simon Dietz, 2011. "High impact, low probability? An empirical analysis of risk in the economics of climate change," Climatic Change, Springer, vol. 108(3), pages 519-541, October.
    9. Camerer, Colin & Weber, Martin, 1992. " Recent Developments in Modeling Preferences: Uncertainty and Ambiguity," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 325-70, October.
    10. Ackerman, Frank & Stanton, Elizabeth A. & Bueno, Ramón, 2010. "Fat tails, exponents, extreme uncertainty: Simulating catastrophe in DICE," Ecological Economics, Elsevier, vol. 69(8), pages 1657-1665, June.
    11. Hanemann, W. Michael, 2008. "What is the Economic Cost of Climate Change?," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt9g11z5cc, Department of Agricultural & Resource Economics, UC Berkeley.
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