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

Author

Listed:
  • David Anthoff

    (Economic and Social Research Institute (ESRI))

  • Richard S. J. Tol

    (Economic and Social Research Institute (ESRI))

  • Gary W. Yohe

    (Wesleyan University)

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.

Suggested Citation

  • David Anthoff & Richard S. J. Tol & Gary W. Yohe, 2008. "Risk Aversion, Time Preference, and the Social Cost of Carbon," Papers WP252, Economic and Social Research Institute (ESRI).
    • Handle: RePEc:esr:wpaper:wp252
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    File URL: https://www.esri.ie/pubs/WP252.pdf
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    References listed on IDEAS

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    1. David Evans & Haluk Sezer, 2004. "Social discount rates for six major countries," Applied Economics Letters, Taylor & Francis Journals, vol. 11(9), pages 557-560.
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    Cited by:

    1. Steve Newbold & Charles Griffiths & Christopher C. Moore & Ann Wolverton & Elizabeth Kopits, 2010. "The "Social Cost of Carbon" Made Simple," NCEE Working Paper Series 201007, National Center for Environmental Economics, U.S. Environmental Protection Agency, revised Aug 2010.
    2. Marlos Goes & Nancy Tuana & Klaus Keller, 2011. "The economics (or lack thereof) of aerosol geoengineering," Climatic Change, Springer, vol. 109(3), pages 719-744, December.
    3. Elizabeth A. Stanton & Frank Ackerman, 2009. "Climate and development economics: Balancing science, politics and equity," Natural Resources Forum, Blackwell Publishing, vol. 33(4), pages 262-273, November.
    4. Kousky, Carolyn & Kopp, Robert E. & Cooke, Roger M., 2011. "Risk premia and the social cost of carbon: A review," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 5, pages 1-24.
    5. Richard S J Tol, 2018. "The Economic Impacts of Climate Change," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 12(1), pages 4-25.
    6. Patrice Dumas & Etienne Espagne & Baptiste Perrissin-Fabert & Antonin Pottier, 2012. "Comprehensive Description of RESPONSE," Working Papers hal-00866414, HAL.
    7. Helgeson, Jennifer & Dietz, Simon & Atkinson, Giles D. & Hepburn, Cameron & Sælen, Håkon, 2009. "Siblings, not triplets: social preferences for risk, inequality and time in discounting climate change," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 3, pages 1-28.
    8. Marc D. Davidson, 2012. "Intergenerational Justice: How Reasonable Man Discounts Climate Damage," Sustainability, MDPI, vol. 4(1), pages 1-17, January.
    9. Baum, Seth D., 2009. "Description, prescription and the choice of discount rates," Ecological Economics, Elsevier, vol. 69(1), pages 197-205, November.
    10. Kopp, Robert E. & Mignone, Bryan K., 2012. "The US government's social cost of carbon estimates after their first two years: Pathways for improvement," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 6, pages 1-41.

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