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A shapley value approach to pricing climate risks

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  • Cooke, Roger M.

Abstract

This paper prices the risk of climate change by calculating a lower bound for the price of a virtual insurance policy against climate risks associated with the business as usual (BAU) emissions path. In analogy with ordinary insurance pricing, this price depends on the current risk to which society is exposed on the BAU emissions path and on a second emissions path reflecting risks that society is willing to take. The difference in expected damages on these two paths is the price which a risk neutral insurer would charge for the risk swap excluding transaction costs and profits, and it is also a lower bound on society's willingness to pay for this swap. The price is computed by (1) identifying a probabilistic risk constraint that society accepts, (2) computing an optimal emissions path satisfying that constraint using an abatement cost function, (3) computing the extra expected damages from the business as usual path, above those of the risk constrained path, and (4) apportioning those excess damages over the emissions per ton in the various time periods. The calculations follow the 2010 US government social cost of carbon analysis, and are done with DICE2009.

Suggested Citation

  • Cooke, Roger M., 2011. "A shapley value approach to pricing climate risks," Economics Discussion Papers 2011-17, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwedp:201117
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    References listed on IDEAS

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    1. 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.
    2. Robert Mendelsohn, 2008. "Is the Stern Review an Economic Analysis?," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 2(1), pages 45-60, Winter.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Climate change; insurance premium; Shapley value; DICE;
    All these keywords.

    JEL classification:

    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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