Risk Aversion, Time Preference, and the Social Cost of Carbon

September 4, 2008
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The Stern Review reported a social cost of carbon of over $300/tC, calling for ambitious climate policy. We here conduct a systematic sensitivity analysis of this result on two crucial parameters: the rate of pure time preference, and the rate of risk aversion. We show that the social cost of carbon lies anywhere in between 0 and $120,000/tC. However, if we restrict these two parameters to match observed behavior, an expected social cost of carbon of $60/tC results. If we correct this estimate for income differences across the world, the social cost of carbon rises to over $200/tC.

Author(s)
David Anthoff
Richard Tol
Research Area(s)

Publication Details

Publisher

ESRI

Place of Publication

Dublin

Date of Publication

September 4, 2008

ESRI Series

ESRI Working Paper 252