Risk Management in Commodity Markets: From Shipping to Agriculturals and Energy

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Precaution and a Dismal Theorem: Implications for Climate Policy and Climate Research

Gary W. Yohe and Richard S. J. Tol

7.1 INTRODUCTION

Economic efficiency has long been a gold standard for evaluating policies. In the context of climate change, the search for efficient solutions to the policy problem began in earnest with Nordhaus (1991), and it has evolved into using elaborate, regionally disaggregated integrated assessment models to judge the relative expected benefits and costs of various policy options across a wide range of possible futures. Cline (1992, 1997, 2004), Maddison (1995), Nordhaus (1991, 1993, 1994), Nordhaus and Yang (1996), Nordhaus and Boyer (2000), Roughgarden and Schneider (1999), Stern et al. (2006), Tol (2002) and Uzawa (2003) are all examples of this approach. These and many other studies are fundamentally optimization exercises, and many use Monte Carlo simulations to set the expected marginal benefits of emission reduction equal to its expected marginal cost. This is why calculations of the social cost of carbon (SCC) have become so popular.¹

It is widely known that published estimates of the social cost of carbon vary widely. An early survey conducted by Tol (2005) reported that fully 12 % of then available published estimates were non-positive. Their median was $13 per tonne of carbon, and their mean was $85 per tonne. Tol (2007) offers an updated survey of more than 200 estimates. His new results show a median for peer-reviewed estimates with a ...