Working Paper: NBER ID: w18704
Authors: Yongyang Cai; Kenneth L. Judd; Thomas S. Lontzek
Abstract: There is great uncertainty about the impact of anthropogenic carbon on future economic wellbeing. We use DSICE, a DSGE extension of the DICE2007 model of William Nordhaus, which incorporates beliefs about the uncertain economic impact of possible climate tipping events and uses empirically plausible parameterizations of Epstein-Zin preferences to represent attitudes towards risk. We find that the uncertainty associated with anthropogenic climate change imply carbon taxes much higher than implied by deterministic models. This analysis indicates that the absence of uncertainty in DICE2007 and similar models may result in substantial understatement of the potential benefits of policies to reduce GHG emissions.
Keywords: Climate Change; Social Cost of Carbon; Stochastic Modeling; Risk Preferences
JEL Codes: C63; D81; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Uncertainty associated with anthropogenic climate change (D89) | Higher carbon taxes (H23) |
| Risk-averse preferences (D11) | Higher valuation of future damages (J17) |
| Absence of stochastic elements in existing models (C69) | Understatement of potential benefits of policies aimed at reducing greenhouse gas emissions (Q54) |
| Risk aversion (D81) | Impact of uncertainty regarding damage levels on carbon tax (H23) |
| Climate risk (Q54) | Policy responses (E69) |