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Social Cost of Carbon Under Stochastic Tipping Points: when does risk play a role?

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  • Nicolas Taconet

    (ENPC - École nationale des ponts et chaussées, CIRED - Centre International de Recherche sur l'Environnement et le Développement - Cirad - Centre de Coopération Internationale en Recherche Agronomique pour le Développement - EHESS - École des hautes études en sciences sociales - AgroParisTech - ENPC - École nationale des ponts et chaussées - Université Paris-Saclay - CNRS - Centre National de la Recherche Scientifique)

  • Céline Guivarch

    (ENPC - École nationale des ponts et chaussées, CIRED - Centre International de Recherche sur l'Environnement et le Développement - Cirad - Centre de Coopération Internationale en Recherche Agronomique pour le Développement - EHESS - École des hautes études en sciences sociales - AgroParisTech - ENPC - École nationale des ponts et chaussées - Université Paris-Saclay - CNRS - Centre National de la Recherche Scientifique)

  • Antonin Pottier

    (EHESS - École des hautes études en sciences sociales, CIRED - Centre International de Recherche sur l'Environnement et le Développement - Cirad - Centre de Coopération Internationale en Recherche Agronomique pour le Développement - EHESS - École des hautes études en sciences sociales - AgroParisTech - ENPC - École nationale des ponts et chaussées - Université Paris-Saclay - CNRS - Centre National de la Recherche Scientifique)

Abstract

Is climate change concerning because of its expected damages, or because of the risk that damages could be very high? Climate damages are uncertain, in particular they depend on whether the accumulation of greenhouse gas emissions will trigger a tipping point. In this article, we investigate how much risk contributes to the Social Cost of Carbon in the presence of a tipping point inducing a higher-damage regime. To do so, we decompose the eect of a tipping point as an increase in expected damages plus a zero-mean risk on damages. First, using a simple analytical model, we show that the SCC is primarily driven by expected damages, while the eect of pure risk is only of second order. Second, in a numerical experiment using a stochastic Integrated Assessment Model, we show that expected damages account for most of the SCC when the tipping point induces a productivity shock lower than 10%, the high end of the range commonly used in the literature. It takes both a large productivity shock and high risk aversion for pure risk to signicantly contribute to the SCC. Our analysis suggests that the risk aversion puzzle, which is the usual nding that risk aversion has a surprisingly little eect on the SCC, occurs since the SCC is well estimated using expected damages only. However, we show that the risk aversion puzzle does not hold for large productivity shocks, as pure risk greatly contributes to the SCC in these cases. Keywords Climate change • Tipping points • Expected utility • Integrated Assessment Models •

Suggested Citation

  • Nicolas Taconet & Céline Guivarch & Antonin Pottier, 2021. "Social Cost of Carbon Under Stochastic Tipping Points: when does risk play a role?," Post-Print hal-03167567, HAL.
    • Handle: RePEc:hal:journl:hal-03167567
    DOI: 10.1007/s10640-021-00549-x
    Note: View the original document on HAL open archive server: https://hal.science/hal-03167567v1
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    Cited by:

    1. Richard S. J. Tol, 2023. "Social cost of carbon estimates have increased over time," Nature Climate Change, Nature, vol. 13(6), pages 532-536, June.
    2. Richard S. J. Tol, 2021. "Europe’s Climate Target for 2050: An Assessment," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 56(6), pages 330-335, November.

    More about this item

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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