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The Social Costs of Greenhouse Gas Emissions: An Expected Value Approach

This paper provides an order-of-rnagnitude assessment of the marginal social costs of greenhouse gas emissions. Re calculations are based on a stochastic greenhouse damage model in which key parameters are random. This allows a closer representation of current scientific understanding and also enables calculation of a damage probability distribution. Thus, we account explicitly for the uncertain nature of the global warming phenomenon. We estimate social costs of CO2 emissions in the order of 20 $/tC for emissions between 1991 and 2000, a value which rises over time to about 28 $/tC in 2021-2030. Similar figures for CH4 and N2O are also provided. As a consequence of the prevailing uncertainty, the standard deviation of the estimates is rather high. The distribution is positively skewed, which implies that the currently predominant method of using best guess values will lead to an underestimation of the expected costs of emissions.

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Energy Specializations: Energy and the Environment – Climate Change and Greenhouse Gases; Energy and the Environment – Policy and Regulation

JEL Codes:
Q54 - Climate; Natural Disasters and Their Management; Global Warming
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Greenhouse gas emissions, Social costs, Expected value approach, CETA, DICE

DOI: 10.5547/ISSN0195-6574-EJ-Vol15-No2-9

Published in Volume15, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.