The Social Cost of Carbon When We Wish for Full-Path Robustness

Published Online:https://doi.org/10.1287/mnsc.2023.4736

References

  • Anderson EW, Brock WA, Sanstad AH (2016) Robust consumption and energy decisions. Preprint, submitted December 31, http://dx.doi.org/10.2139/ssrn.2844980.Google Scholar
  • Anderson EW, Hansen LP, Sargent TJ (2012) Small noise methods for risk-sensitive/robust economies. J. Econom. Dynamic Control 36(4):468–500.CrossrefGoogle Scholar
  • Bansal R, Yaron A (2004) Risks for the long run: A potential resolution of asset pricing puzzles. J. Finance 59(4):1481–1509.CrossrefGoogle Scholar
  • Barnett M, Brock W, Hansen LP (2020) Pricing uncertainty induced by climate change. Rev. Financial Stud. 33(3):1024–1066.CrossrefGoogle Scholar
  • Bäuerle N, Jaśkiewicz A (2018) Stochastic optimal growth model with risk sensitive preferences. J. Econom. Theory 173:181–200.CrossrefGoogle Scholar
  • Bäuerle N, Rieder U (2014) More risk-sensitive Markov decision processes. Math. Oper. Res. 39(1):105–120.LinkGoogle Scholar
  • Berger L, Emmerling J, Tavoni M (2017) Managing catastrophic climate risks under model uncertainty aversion. Management Sci. 63(3):749–765.LinkGoogle Scholar
  • Berger L, Marinacci M (2020) Model uncertainty in climate change economics: A review and proposed framework for future research. Environ. Resource Econom. 77(3):475–501.CrossrefGoogle Scholar
  • Bielecki TR, Pliska SR (2003) Economic properties of the risk-sensitive criterion for portfolio management. Rev. Accounting Finance 2(2):3–17.CrossrefGoogle Scholar
  • Bommier A, Kochov A, Le Grand F (2017) On monotone recursive preferences. Econometrica 85(5):1433–1466.CrossrefGoogle Scholar
  • Bommier A, Lanz B, Zuber S (2015) Models-as-usual for unusual risks? On the value of catastrophic climate change. J. Environ. Econom. Management 74:1–22.CrossrefGoogle Scholar
  • Bommier A, Le Grand F (2019) Risk aversion and precautionary savings in dynamic settings. Management Sci. 65(3):1386–1397.LinkGoogle Scholar
  • Brock W, Xepapadeas A (2020) Regional climate policy under deep uncertainty: Robust control and distributional concerns. Environ. Development Econom. 26(3):211–238.Google Scholar
  • Brown AL, Kim H (2014) Do individuals have preferences used in macro-finance models? An experimental investigation. Management Sci. 60(4):939–958.LinkGoogle Scholar
  • Burgaard J, Steffensen M (2020) Eliciting risk preferences and elasticity of substitution. Decision Anal. 17(4):314–329.LinkGoogle Scholar
  • Cai J, Chen X, Dai M (2018) Portfolio selection with capital gains tax, recursive utility, and regime switching. Management Sci. 64(5):2308–2324.LinkGoogle Scholar
  • Cai Y (2019) Computational methods in environmental and resource economics. Annual Rev. Resource Econom. 11(1):59–82.CrossrefGoogle Scholar
  • Cai Y (2021) The role of uncertainty in controlling climate change. Oxford Research Encyclopedia of Economics and Finance. Accessed March 17, 2023, https://oxfordre.com/economics/view/10.1093/acrefore/9780190625979.001.0001/acrefore-9780190625979-e-573.Google Scholar
  • Cai Y, Lontzek TS (2019) The social cost of carbon with economic and climate risks. J. Political Econom. 127(6):2684–2734.CrossrefGoogle Scholar
  • Cai Y, Judd KL, Lontzek TS (2017) The social cost of carbon with economic and climate risks. Hoover Economics Working Paper 18113, Hoover Institute, Stanford, CA.Google Scholar
  • Cai Y, Lontzek TS, Lenton TM (2016) Risk of multiple interacting tipping points should encourage rapid CO2 emission reduction. Nature Climate Change 6(5):520–525.CrossrefGoogle Scholar
  • Cass D (1965) Optimum growth in an aggregative model of capital accumulation. Rev. Econom. Stud. 32(3):233–240.CrossrefGoogle Scholar
  • Chari VV (2018) The role of uncertainty and risk in climate change economics. Technical Report 576, Federal Reserve Bank of Minneapolis, Minneapolis.Google Scholar
  • Chen Z, Epstein L (2002) Ambiguity, risk and asset returns in continuous time. Econometrica 70(4):1403–1443.CrossrefGoogle Scholar
  • de Groot O, Richter AW, Throckmorton NA (2022) Valuation risk revalued. Quant. Econom. 13(2):723–759.Google Scholar
  • Dietz S, van der Ploeg F, Rezai A, Venmans F (2021) Are economists getting climate dynamics right and does it matter? J. Assoc. Environ. Resource Econom. 8(5):895–921.Google Scholar
  • Di Masi GV, Stettner Ł (1999) Risk-sensitive control of discrete-time Markov processes with infinite horizon. SIAM J. Control Optim. 38(1):61–78.CrossrefGoogle Scholar
  • Duffie D, Epstein LG (1992) Stochastic differential utility. Econometrica 60(2):353–394.CrossrefGoogle Scholar
  • Epstein L, Schneider M (2003) Recursive multiple-priors. J. Econom. Theory 113(1):1–31.CrossrefGoogle Scholar
  • Epstein LG, Farhi E, Strzalecki T (2014) How much would you pay to resolve long-run risk? Amer. Econom. Rev. 104(9):2680–2697.CrossrefGoogle Scholar
  • Epstein LG, Zin SE (1989) Substitution, risk aversion, and the temporal behavior of consumption and asset returns: A theoretical framework. Econometrica 57(4):937–969.CrossrefGoogle Scholar
  • Group of Thirty (2020) Mainstreaming the transition to a net-zero economy. Technical report, Group of Thirty, Washington, DC.Google Scholar
  • Hansen LP, Brock WA (2019) Wrestling with uncertainty in climate economic models. Becker Friedman Institute for Economics Working Paper 71, University of Chicago, Chicago.Google Scholar
  • Hansen LP, Miao J (2018) Aversion to ambiguity and model misspecification in dynamic stochastic environments. Proc. Natl. Acad. Sci. USA 115(37):9163–9168.CrossrefGoogle Scholar
  • Hansen LP, Sargent TJ (1995) Discounted linear exponential quadratic Gaussian control. IEEE Trans. Automatic Control 40(5):968–971.CrossrefGoogle Scholar
  • Hansen LP, Sargent TJ, Turmuhambetova G, Williams N (2006) Robust control and model misspecification. J. Econom. Theory 128(1):45–90.CrossrefGoogle Scholar
  • Hennlock M (2009) Robust control in global warming management: An analytical dynamic integrated assessment. Technical report, Department of Economics, University of Gothenburg, Sweden.Google Scholar
  • Howard PH, Sylvan D (2020) Wisdom of the experts: Using survey responses to address positive and normative uncertainties in climate-economic models. Climate Change 162(2):213–232.CrossrefGoogle Scholar
  • Howard RA, Matheson JE (1972) Risk-sensitive Markov decision processes. Management Sci. 18(7):356–369.LinkGoogle Scholar
  • Intergovernmental Panel on Climate Change (2021) Climate change 2021: The physical science basis. Masson-Delmotte V, Zhai P, Pirani A, Connors S, Péan C, Berger S, Caud N, Chen Y, Goldfarb L, Gomis M, Huang M, Leitzell K, Lonnoy E, Matthews J, Maycock T, Waterfield T, Yelekçi O, Yu R, Zhou B, eds. Contribution of Working Group I to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change (Cambridge University Press, Cambridge, UK).Google Scholar
  • International Renewable Energy Agency (2017) Stranded assets and renewables: How the energy transition affects the value of energy reserves, buildings and capital stock. Technical report, International Renewable Energy Agency, Abu Dhabi. Accessed March 18, 2023, https://www.irena.org/publications/2017/Jul/Renewable-Energy-Statistics-2017.Google Scholar
  • Jacobson DH (1973) Optimal stochastic linear systems with exponential performance criteria and their relation to deterministic differential games. IEEE Trans. Automatic Control 18(2):124–131.CrossrefGoogle Scholar
  • Johnsen TH, Donaldson JB (1985) The structure of intertemporal preferences under certainty and time consistent plans. Econometrica 53(6):1451–1458.CrossrefGoogle Scholar
  • Judd KL (1998) Numerical Methods in Economics (MIT Press, Cambridge, MA).Google Scholar
  • Kapoor M, Ravi S (2017) Elasticity of intertemporal substitution in consumption in the presence of inertia: Empirical evidence from a natural experiment. Management Sci. 63(12):4188–4200.LinkGoogle Scholar
  • Kihlstrom RE, Mirman LJ (1974) Risk aversion with many commodities. J. Econom. Theory 8(3):361–388.CrossrefGoogle Scholar
  • Klibanoff P, Marinacci M, Mukherji S (2005) A smooth model of decision making under ambiguity. Econometrica 73(6):1849–1892.CrossrefGoogle Scholar
  • Koopmans TC (1963) On the concept of optimal economic growth. Cowles Foundation Discussion Papers. 392.Google Scholar
  • Kreps DM, Porteus EL (1978) Temporal resolution of uncertainty and dynamic choice theory. Econometrica 46(1):185–200.CrossrefGoogle Scholar
  • Kreps DM, Porteus EL (1979) Dynamic choice theory and dynamic programming. Econometrica 47(1):91–100.CrossrefGoogle Scholar
  • Lemoine D, Traeger CP (2016) Ambiguous tipping points. J. Econom. Behav. Organ. 132(B):5–18.CrossrefGoogle Scholar
  • Li X, Narajabad B, Temzelides T (2016) Robust dynamic energy use and climate change. Quant. Econom. 7(3):821–857.CrossrefGoogle Scholar
  • Lontzek TS, Cai Y, Judd KL, Lenton TM (2015) Stochastic integrated assessment of climate tipping points indicates the need for strict climate policy. Nature Climate Change 5(5):441–444.CrossrefGoogle Scholar
  • Matthews HD, Gillett NP, Stott PA, Zickfeld K (2009) The proportionality of global warming to cumulative carbon emissions. Nature 459(7248):829–832.CrossrefGoogle Scholar
  • Matthews HD, Solomon S, Pierrehumbert R (2012) Cumulative carbon as a policy framework for achieving climate stabilization. Philos. Trans. Roy. Soc. A Math. Physical Engrg. Sci. 370(1974):4365–4379.CrossrefGoogle Scholar
  • Miftakhova A, Judd KL, Lontzek TS, Schmedders K (2020) Statistical approximation of high-dimensional climate models. J. Econometrics 214(1):67–80.CrossrefGoogle Scholar
  • Millner A, Dietz S, Heal G (2013) Scientific ambiguity and climate policy. Environ. Resource Econom. 55(1):21–46.CrossrefGoogle Scholar
  • Nordhaus WD (1993) Rolling the “dice”: An optimal transition path for controlling greenhouse. Resource Energy Econom. 15(1):27–50.CrossrefGoogle Scholar
  • Nordhaus WD (2017) Revisiting the social cost of carbon. Proc. Natl. Acad. Sci. USA 114(7):1518–1523.CrossrefGoogle Scholar
  • Pohl W, Schmedders K, Wilms O (2018) Higher order effects in asset pricing models with long-run risks. J. Finance 73(3):1061–1111.CrossrefGoogle Scholar
  • Ramsey FP (1928) A mathematical theory of saving. Econom. J. (London) 38(152):543–559.Google Scholar
  • Rezai A, van der Ploeg F (2017) Climate policies under climate model uncertainty: Max-min and min-max regret. Energy Econom. 68(1):4–16.CrossrefGoogle Scholar
  • Rudik I (2020) Optimal climate policy when damages are unknown. Amer. Econom. J. Econom. Policy 12(2):340–373.CrossrefGoogle Scholar
  • Simmons CT, Matthews HD (2016) Assessing the implications of human land-use change for the transient climate response to cumulative carbon emissions. Environ. Res. Lett. 11(3):035001.CrossrefGoogle Scholar
  • Skiadas C (2003) Robust control and recursive utility. Finance Stochastics 7:475–489.CrossrefGoogle Scholar
  • Svensson LEO (1989) Portfolio choice with non-expected utility in continuous time. Econom. Lett. 30(4):313–317.CrossrefGoogle Scholar
  • Tallarini TD Jr (2000) Risk-sensitive real business cycles. J. Monetary Econom. 45(3):507–532.CrossrefGoogle Scholar
  • United Nations Department of Economic and Social Affairs (2019) World population prospects 2019, online edition. rev. 1. Technical report, United Nations, New York.Google Scholar
  • van der Ploeg F (1984a) Economic policy rules for risk-sensitive decision making. J. Econom. 44(3):207–235.Google Scholar
  • van der Ploeg F (1984b) Risk and linear-quadratic stabilization. Econom. Lett. 15(1):73–78.CrossrefGoogle Scholar
  • van der Ploeg F (1993) A closed-form solution for a model of precautionary savings. Rev. Econom. Stud. 60(2):385–395.CrossrefGoogle Scholar
  • van der Ploeg F, de Zeeuw A (2017) Climate tipping and economic growth: Precautionary capital and the price of carbon. J. Eur. Econom. Assoc. 16(5):1577–1617.CrossrefGoogle Scholar
  • Weil P (1990) Nonexpected utility in macroeconomics. Quart. J. Econom. 105(1):29–42.CrossrefGoogle Scholar
  • Weil P (1993) Precautionary savings and the permanent income hypothesis. Rev. Econom. Stud. 60(2):367–383.CrossrefGoogle Scholar
  • Weitzman ML (2009) On modeling and interpreting the economics of catastrophic climate change. Rev. Econom. Statist. 91(1):1–19.CrossrefGoogle Scholar
  • Westermann R (2018) Measuring agency costs over the business cycle. Management Sci. 64(12):5748–5768.LinkGoogle Scholar
  • Whittle P (1990) Risk-Sensitive Optimal Control (Wiley, Chichester, UK).Google Scholar
  • World Bank (2020) State and Trends of Carbon Pricing 2020 (World Bank, Washington, DC).CrossrefGoogle Scholar
INFORMS site uses cookies to store information on your computer. Some are essential to make our site work; Others help us improve the user experience. By using this site, you consent to the placement of these cookies. Please read our Privacy Statement to learn more.