Skip to content
BY 4.0 license Open Access Published by De Gruyter Open Access December 20, 2011

Risk Premia and the Social Cost of Carbon: A Review

Carolyn Kousky EMAIL logo , Robert E. Kopp and Roger Cooke
From the journal Economics

Abstract

Reducing greenhouse gas emissions not only lowers expected damages from climate change but also reduces the risk of catastrophic impacts. However, estimates of the social cost of carbon, which measures the marginal value of carbon dioxide abatement, often do not capture this risk reduction benefit. Risk-averse individuals are willing to pay a risk premium, an additional amount beyond the difference in expected damages, to reduce risks. The authors review methods used and estimates obtained for calculating a risk premium to be included in the social cost of carbon. While more research is needed in this area, work to date suggests a positive, and potentially substantial, risk premium on the social cost of carbon is warranted.

JEL Classification: Q54

References

Ackerman, F., E.A. Stanton, and R. Bueno (2009). Fat tails, exponents, and extreme uncertainty: simulating catastrophe in DICE. Stockholm Environment Institute Working Paper WP-US-0901. http://sei-us.org/Publications_PDF/SEI-WorkingPaperUS-0901.pdfSearch in Google Scholar

Anthoff, D., R.S.J. Tol, and G.W. Yohe (2009). Risk aversion, time preference, and the social cost of carbon. Environmental Research Letters 4. doi:10.1088/1748-9326/4/2/024002. http://iopscience.iop.org/1748-9326/4/2/02400210.1088/1748-9326/4/2/024002Search in Google Scholar

Azar, C. and K. Lindgren (2003). Catastrophic Events and stochastic cost-benefit analysis of climate change. Climatic Change 56(3): 245–255. http://www.springerlink.com/content/u0466411k34v0032/10.1023/A:1021743622080Search in Google Scholar

Brekke, K.A. and O. Johansson-Stenman (2008). The behavioural economics of climate change. Oxford Review of Economic Policy 24(2): 280–297. http://oxrep.oxfordjournals.org/content/24/2/280.short10.1093/oxrep/grn012Search in Google Scholar

Ceronsky, M., D. Anthoff, C. Hepburn and R. S. J. Tol (2005). Checking the price tag on catastrophe: the social cost of carbon under non-linear climate response. Working Paper FNU-87. Forschungsstelle Nachhaltige Umweltentwicklung, Hamburg. http://www.fnu.zmaw.de/fileadmin/fnu-files/publication/workingpapers/catastrophewp.pdfSearch in Google Scholar

CNA Corporation (2007). National security and the threat of climate change. The CNA Corporation, Alexandria, Virginia. http://www.cna.org/reports/climateSearch in Google Scholar

Crost, B. and C. Traeger (2010). Risk and aversion in the integrated assessment of climate change. CUDARE Working Paper 1104. Department of Agricultural & Resources Economics, UC Berkeley, Berkeley, CA. http://escholarship.org/uc/item/1562s275#page-2Search in Google Scholar

Dietz, S. (2011a). High impact, low probability? an empirical analysis of risk in the economics of climate change. Climatic Change 108(3): 519–541. http://ideas.repec.org/a/spr/climat/v108y2011i3p519-541.html10.1007/s10584-010-9993-4Search in Google Scholar

Dietz, S. (2011b). The treatment of risk and uncertainty in the US social cost of carbon for regulatory impact analysis. Centre for Climate Change Economics and Policy Working Paper No. 64. Centre for Climate Change Economics and Policy, University of Leeds and the London School of Economics and Political Science, London, UK.10.5018/economics-ejournal.ja.2012-18Search in Google Scholar

Dietz, S., C. Hope and N. Patmore (2007). Some economics of ‘dangerous’ climate change: reflections on the stern review. Global Environmental Change 17: 311–325. http://www.mendeley.com/research/some-economics-of-dangerous-climatechange-reflections-on-the-stern-review-1/10.1016/j.gloenvcha.2007.05.008Search in Google Scholar

Gerst, M.D., R.B. Howarth and M.E. Borsuk (2010). Accounting for the risk of extreme outcomes in an integrated assessment of climate change. Energy Policy 38: 4540–4548. http://ideas.repec.org/a/eee/enepol/v38y2010i8p4540-4548.html10.1016/j.enpol.2010.04.008Search in Google Scholar

Gerst, M.D., R.B. Howarth and M.E. Borsuk (in prep.). Society’s aversion to risk justifies aggressive greenhouse gas emissions reduction. Dartmouth College, Hanover, NH. http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CB4QFjAA&url=http%3A%2F%2Fgretha.ubordeaux4.fr%2Fspip.php%3Faction%3Dacceder_document%26arg%3D718%26cle%3Dbb79b676f737ae68f2715359bd872df3%26file%3Dpdf%252Fgerst_et_al_working_paper.pdf&ei=PKnnTrD6NePx0gHJiZ3_CQ&usg=AFQjCNFtkC_qIVREcJh4AT85Tg44gERM4gSearch in Google Scholar

Gjerde, J., S. Grepperud and S. Kverndokk (1999). Optimal climate policy under the possibility of a catastrophe. Resource and Energy Economics 21: 289–317. http://ideas.repec.org/a/eee/resene/v21y1999i3-4p289-317.html10.1016/S0928-7655(99)00006-8Search in Google Scholar

Heal, G. (2009). The economics of climate change: a post-stern perspective. Climatic Change 96: 275–297. http://www.springerlink.com/content/2866362w164531tg/10.1007/s10584-009-9641-zSearch in Google Scholar

Heal, G. and B. Kristrom (2002). Uncertainty and climate change. Environmental and Resource Economics 22: 3–39.Search in Google Scholar

Hennlock, M. (2009). Robust control in global warming management: an analytical dynamic integrated assesment. RFF Discussion Paper 09-19. Resources for the Future, Washington, DC, May. http://www.rff.org/documents/RFF-DP-09-19.pdf10.2139/ssrn.1398905Search in Google Scholar

Howarth, R.B. (2003). Discounting and uncertainty in climate change policy. Land Economics 79(3): 369–381.Search in Google Scholar

Interagency Working Group on Social Cost of Carbon (2010). Social cost of carbon for regulatory impact analysis under executive order 12866. Washington, DC, February.Search in Google Scholar

Kopp, R.E., A. Golub, N.O. Keohane, and C. Ondra (2011). The influence of the specification of climate change damages on the social cost of carbon. Economics Discussion Papers, No 2011-22. http://www.economics-ejournal.org/economics/discussionpapers/2011-22.Search in Google Scholar

Kunreuther, H. and R. M. Hogarth (1992). How does ambiguity affect insurance decisions? In G. Dionne (Ed.), Contributions to Insurance Economics. Boston: Kluwer.Search in Google Scholar

Mastrandrea, M. D. and S. H. Schneider (2001). Integrated assessment of abrupt climatic changes Climate Policy 1(4): 433–449. http://stephenschneider.stanford.edu/Publications/PDF_Papers/IntegratedAssessment.pdfSearch in Google Scholar

Mastrandrea, M.D. and S.H. Schneider (2004). Probabilistic integrated assessment of “dangerous” climate change. Science 304(April 23): 571–575. http://www.sciencemag.org/content/304/5670/571.abstract10.1126/science.1094147Search in Google Scholar

McInerney, D. and K. Keller (2008). Economically optimal risk reduction strategies in the face of uncertain climate thresholds. Climatic Change 91: 29–41. http://www.springerlink.com/content/p238w50423462307/10.1007/s10584-006-9137-zSearch in Google Scholar

McInerney, D., R. Lempert and K. Keller (forthcoming). What are robust strategies in the face of uncertain climate threshold responses? Climatic Change.Search in Google Scholar

Mendelsohn, R. (2008). Is the Stern Review an economic analysis? Review of Environmental Economics and Policy 2(1): 45–60. http://ideas.repec.org/a/oup/renvpo/v2y2008i1p45-60.htmlSearch in Google Scholar

Millner, A., S. Dietz and G. Heal (2010). Ambiguity and climate policy. Centre for Climate Change Economics and Policy, University of Leeds and the London School of Economics and Political Science, London, UK.10.3386/w16050Search in Google Scholar

Nestle, I. (2008). Evaluation of risk in cost-benefit analysis of climate change. In B. Hansjürgens and R. Antes (Eds.), Economics and Management of Climate Change:Risks, Mitigation and Adaptation. New York: Springer. http://www.springerlink.com/content/k48378675111h165/10.1007/978-0-387-77353-7_3Search in Google Scholar

Newbold, S. and A. Daigneault (2009). Climate response uncertainty and the benefits of greenhouse gas emissions reductions. Environmental and Resource Economics 44(3): 351–377. http://ideas.repec.org/a/kap/enreec/v44y2009i3p351-377.html10.1007/s10640-009-9290-8Search in Google Scholar

Newbold, S.C. and A. Daigneault (2010). Uncertainty and the benefits of climate change policies. In J. Gulledge, L. J. Richardson, L. Adkins and S. Seidel (Eds.), Assessing the Benefits of Avoided Climate Change: Cost-Benefit Analysis and Beyond. Arlington, VA: Pew Center on Global Climate Change. http://www.pewclimate.org/events/2009/benefitsworkshopSearch in Google Scholar

Newbold, S.C., C. Griffiths, C. Moore, A. Wolverton and E. Kopits (2010). The “social cost of carbon” made simple. Working Paper No. 10-07. National Center for Environmental Economics, United States Enviromental Protection Agency, Washington, D.C. http://ideas.repec.org/p/nev/wpaper/wp201007.htmlSearch in Google Scholar

Nordhaus, W. (1994). Managing the global commons. Cambridge, MA: MIT Press. http://mitpress.mit.edu/catalog/item/default.asp?ttype=2&tid=7299Search in Google Scholar

Nordhaus, W. (2007). The challenge of global warming: economic models and environmental policy. New Haven, CT: Yale University Press. http://nordhaus.econ.yale.edu/dice_mss_072407_all.pdfSearch in Google Scholar

Nordhaus, W. (2008). A question of balance: weighing the options on global warming policies. New Haven, CT: Yale University Press. http://yalepress.yale.edu/book.asp?isbn=9780300137484Search in Google Scholar

Office of Management and Budget (2003). Circular A-4. Office of Management and Budget, Washington, D.C.Search in Google Scholar

Pindyck, R.S. (2010). Fat tails, thin tails, and climate change policy. NBER Working Paper No. 16353. National Bureau of Economic Research, Cambridge, MA. http://ideas.repec.org/p/nbr/nberwo/16353.html10.3386/w16353Search in Google Scholar

Roughgarden, T. and S.H. Schneider (1999). Climate change policy: quantifying uncertainties for damages and optimal carbon taxes. Energy Policy 27(7): 415–429. http://ideas.repec.org/a/eee/enepol/v27y1999i7p415-429.html10.1016/S0301-4215(99)00030-0Search in Google Scholar

Sælen, H., S. Dietz, C. Hepburn, J. Helgeson, and G. Atkinson (2009). Siblings, Not Triplets: Social Preferences for Risk, Inequality and Time in Discounting Climate Change. Economics: The Open-Access, Open-Assessment E-Journal, Vol. 3, 2009-26. http://dx.doi.org/10.5018/economics-ejournal.ja.2009-2610.5018/economics-ejournal.ja.2009-26Search in Google Scholar

Sherwood, S.C. and M. Huber (2010). An adaptability limit to climate change due to heat stress. Proceedings of the National Academy of Sciences 107(21): 9552–9555. http://www.pnas.org/content/107/21/955210.1073/pnas.0913352107Search in Google Scholar

Sterner, T. and U.M. Persson (2008). “An even sterner review: introducing relative prices into the discounting debate. Review of Environmental Economics and Policy 2(1): 61–76. http://ideas.repec.org/a/oup/renvpo/v2y2008i1p61-76.html10.1093/reep/rem024Search in Google Scholar

Tol, R.S.J. (2008). The social cost of carbon: trends, outliers, and catastrophes. Economics: The Open-Access, Open-Assessment E-Journal, Vol. 2, 2008-25. http://www.economics-ejournal.org/economics/journalarticles/2008-2510.5018/economics-ejournal.ja.2008-25Search in Google Scholar

Traeger, C.P. (2009). Recent developments in the intertemporal modeling of uncertainty. Annual Review of Resource Economics 1(1): 261–286. http://ideas.repec.org/a/anr/reseco/v1y2009p261-285.html10.1146/annurev.resource.050708.144242Search in Google Scholar

Viscusi, W.K. and H. Chesson (1999). Hope and fears: the conflicting effects of risk ambiguity. Theory and Decision 47: 153–178. http://www.springerlink.com/content/r61m07n271836q05/10.1023/A:1005173013606Search in Google Scholar

Weitzman, M.L. (2007a). A review of the stern review on the economics of climate change. Journal of Economic Literature XLV(September): 703–724. http://www.cepe.ethz.ch/education/EnergyPolicy/Weitzman.pdf10.1257/jel.45.3.703Search in Google Scholar

Weitzman, M.L. (2007b). Subjective expectations and asset-return puzzles. The American Economic Review 97: 1102–1130. http://ideas.repec.org/a/aea/aecrev/v97y2007i4p1102-1130.html10.1257/aer.97.4.1102Search in Google Scholar

Weitzman, M.L. (2009). On modeling and interpreting the economics of catastrophic climate change. Review of Economics and Statistics 91(1): 1–19. http://ideas.repec.org/a/tpr/restat/v91y2009i1p1-19.html10.1162/rest.91.1.1Search in Google Scholar

Yohe, G. (1996). Exercises in hedging against extreme consequences of global change and the expected value of information. Global Environmental Change 6(2): 87–101.Search in Google Scholar

Yohe, G. and R. Tol (2008). The Stern Review and the economics of climate change: an editorial essay. Climatic Change 89(3): 231–240. http://www.springerlink.com/content/d24654n30830l5lw/10.1007/s10584-008-9431-zSearch in Google Scholar

Published Online: 2011-12-20
Published in Print: 2011-12-01

© 2011 Carolyn Kousky et al., published by Sciendo

This work is licensed under the Creative Commons Attribution 4.0 International License.

Downloaded on 7.12.2022 from frontend.live.degruyter.dgbricks.com/document/doi/10.5018/economics-ejournal.ja.2011-21/html
Scroll Up Arrow