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

Author

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

Abstract

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 29 to 85 percent. Changes in the mean SCCO2 due to the adjustments to the damage function alone range from a reduction of 7 percent to a rise of 12 percent. The combination of both leads to rises of 33 to 115 percent. 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.

Suggested Citation

  • Pycroft, Jonathan & Vergano, Lucia & Hope, Chris & Paci, Daniele & Ciscar, Juan Carlos, 2011. "A tale of tails: Uncertainty and the social cost of carbon dioxide," Economics Discussion Papers 2011-36, Kiel Institute for the World Economy (IfW).
  • Handle: RePEc:zbw:ifwedp:201136
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    References listed on IDEAS

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    1. Richard S. J. Tol, 1999. "The Marginal Costs of Greenhouse Gas Emissions," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 61-81.
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    7. Hope, Chris, 2008. "Discount rates, equity weights and the social cost of carbon," Energy Economics, Elsevier, vol. 30(3), pages 1011-1019, May.
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    10. William D. Nordhaus, 2006. "The "Stern Review" on the Economics of Climate Change," NBER Working Papers 12741, National Bureau of Economic Research, Inc.
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    Cited by:

    1. van den Bergh, J.C.J.M. & Botzen, W.J.W., 2015. "Monetary valuation of the social cost of CO2 emissions: A critical survey," Ecological Economics, Elsevier, vol. 114(C), pages 33-46.
    2. Havranek, Tomas & Irsova, Zuzana & Janda, Karel & Zilberman, David, 2015. "Selective reporting and the social cost of carbon," Energy Economics, Elsevier, pages 394-406.
    3. Richard S. J. Tol, 2015. "Economic impacts of climate change," Working Paper Series 7515, Department of Economics, University of Sussex.
    4. Crost, Benjamin & Traeger, Christian P., 2013. "Optimal climate policy: Uncertainty versus Monte Carlo," Economics Letters, Elsevier, vol. 120(3), pages 552-558.
    5. Raphael Calel & David Stainforth & Simon Dietz, 2015. "Tall tales and fat tails: the science and economics of extreme warming," Climatic Change, Springer, vol. 132(1), pages 127-141, September.
    6. Tim Keighley & Thomas Longden & Supriya Mathew & Stefan Trück, 2014. "Quantifying Catastrophic and Climate Impacted Hazards Based on Local Expert Opinions," Working Papers 2014.93, Fondazione Eni Enrico Mattei.
    7. In Hwang & Frédéric Reynès & Richard Tol, 2013. "Climate Policy Under Fat-Tailed Risk: An Application of Dice," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 56(3), pages 415-436, November.
    8. repec:wsi:ccexxx:v:08:y:2017:i:02:n:s2010007817500087 is not listed on IDEAS
    9. Louise Kessler, 2015. "Estimating the economic impact of the permafrost carbon feedback," GRI Working Papers 219, Grantham Research Institute on Climate Change and the Environment.
    10. Anthony Bonen & Willi Semmler & Stephan Klasen, 2014. "Economic Damages from Climate Change: A Review of Modeling Approaches," SCEPA working paper series. SCEPA's main areas of research are macroeconomic policy, inequality and poverty, and globalization. 2014-3, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.

    More about this item

    Keywords

    Climate change; integrated assessment models; social cost of carbon dioxide; uncertainty;

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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