The Social Cost of Stochastic and Irreversible Climate Change
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.
We thank Kenneth Arrow, Buz Brock, Larry Goulder, Lars Hansen, Larry Karp, Tim Lenton, Karl Schmedders, Christian Träger and Rick van der Ploeg for comments on earlier versions of the paper. We are also grateful for numerous comments from participants of the 2012 Conference on Climate and the Economy organized by the Institute for International Economic Studies. Furthermore, Cai, Judd, and Lontzek gratefully acknowledge NSF support (SES-0951576). Financial support for Lontzek was provided by the Zürcher Universitätsverein, the University of Zurich and the Ecosciencia Foundation. Part of this study was done while Lontzek was visiting the Hoover Institution. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.