Another great journey has come to an end! I am excited to share that our paper Three Reasons to Price Carbon: Accuracy of Simple Rules has been accepted for publication in Quantitative Economics. I am very grateful to my coauthors Ton van den Bremer and Rick van der Ploeg for the great collaboration!
We derive an easy-to-interpret rule for the expected present value of the damages stemming from emitting one ton of carbon dioxide into the atmosphere. We derive this rule, the so-called risk-adjusted social cost of carbon (SCC), using perturbation analysis. Our rule internalizes the adverse effects of global warming on the risk of recurring climate-related disasters, the risk of irreversible cascading climate tipping points, and the usual effect on total factor productivity. Due to its clear interpretation, the rule can be used to inform policy makers and practitioners about the drivers of the SCC. It and its three components approximate the true numerical optimum well, especially if the small parameters (i.e., the share of damages in GDP, the sensitivity of the risk of disasters to temperature and the risk of climate tipping) are small enough and the discount rate is not too small. The rule is also accurate if applied to AK models with a different supply side, e.g., with ongoing technical progress in fossil-fuel production or multiple economic sectors. With a growth-adjusted discount rate of 2%/year, the SCC is $172/tCO2, 70% of which is due to recurring climate disasters and 9% to climate tipping risk.
The paper can be downloaded here. The replication package can be found here. A policy publication on VoxEU based on this paper can be found here.
But this paper is not the end of the story. Together with my PhD student Djep Doreleijers, we are already working on a generalization of those results to a multi-country setting with political transition risk, linking this paper to international coordination problems as in Hambel et al. (2021) and to the transition risk mechanism established in Hambel and van der Ploeg (2025).
