Risk Aversion, Time Preference, and the Social Cost of Carbon. ESRI WP252. September 2008

Anthoff, David and Tol, Richard S.J. and Yohe, Gary W. (2008) Risk Aversion, Time Preference, and the Social Cost of Carbon. ESRI WP252. September 2008. [Working Paper]

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Abstract

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.

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