Social Cost of Carbon Under Stochastic Tipping Points

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.

Testing the Dismal Theorem

“…First, all estimates are treated equally. While some papers present a single estimate of the social cost of carbon, other papers show many variants-1,229 in the case of Taconet et al (2021). Therefore, second, estimates are weighted such that the total weight per paper equals one.…”

“…Still, in DICE, high impacts of climate change reduce economic growth and so emissions, thus limiting the increase in the social cost of carbon, while a high carbon tax further cuts emissions. It is not clear to us how, in this setting, it can be optimal to impose a carbon tax of millions of dollars (Gschnaller 2020) or billions of dollars per ton of carbon (Taconet et al 2021). 5 It 5.…”

Europe’s Climate Target for 2050: An Assessment

“…The social cost of carbon is a central parameter in the economics of climate change and therefore much estimated and debated. Tol (2021) counts 5,791 estimates in 201 papers, published between May 1982 (Nordhaus, 1982) and April 2021 (Taconet et al, 2021). Table 1 shows the mean and standard deviation of the published estimates and of a fi tted kernel density (see Tol, 2021, for details), which better refl ects the right-skewed uncertainty about these estimates.…”

Estimates of the social cost of carbon have not changed over time

“…This is graph "no weights" in Figure S3. While some papers present a single estimate of the social cost of carbon, other papers show many, up to 1,229 variants [207]. This emphasizes studies that ran many sensitivity analyses, which became easier as computers got faster.…”