The economics of climate change On the role of risk and preferences

Climate change is one of the main risks that the economy will face in the upcoming decades. Climate scientists have improved our knowledge about climate change, but future impacts of climate change remain uncertain. This thesis focuses on estimating the social cost of carbon, which is the discounted value of all future damages caused by emitting one unit of carbon today, taking into account this uncertainty. Adding uncertainty increases the social cost of carbon, and thus the optimal carbon price, by a substantial amount. The policy implication is that the large amount of uncertainty around future climate damages should lead to more stringent carbon abatement policy. The focus should not only be on the expected impacts of climate change, but also on limiting the probability of a large irreversible impact.