I am happy to announce that my new working paper “Three reasons to price carbon under uncertainty: Accuracy of simple rules” with my amazing co-authors Ton van den Bremer and Rick van der Ploeg has been released.
This paper derives a simple and intuitive rule for the optimal social cost of carbon using perturbation analysis. This rule internalises the adverse effects of global warming on: (i) total factor productivity; (ii) the risk of recurring climate-related disasters; and (iii) the risk of irreversible climatic tipping points. It approximates the true numerical optimum very well, especially if the share of damages in GDP and the sensitivity of the risks of disasters and tipping points to temperature are small and the risk- and growth-corrected discount rates are not too small. The rule is also accurate with ongoing technical progress in fossil fuel production and multiple economic sectors even though the rule is derived for a one-sector model without such technical progress.