Risk aversion, time preference, and the social cost of carbon

Anthoff, David; Tol, Richard S. J.; Yohe, Gary W.

doi:10.1088/1748-9326/4/2/024002

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Risk aversion, time preference, and the social cost of carbon

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Anthoff, David
IMPRS on Earth System Modelling, MPI for Meteorology, Max Planck Society;

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Anthoff, D., Tol, R. S. J., & Yohe, G. W. (2009). Risk aversion, time preference, and the social cost of carbon. Environmental Research Letters, 4(2): 024002. doi:10.1088/1748-9326/4/2/024002.

Cite as: https://hdl.handle.net/11858/00-001M-0000-0019-F3DC-1

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 $120000/tC. However, if we restrict these two parameters to matching observed behaviour, 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.