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Proc Natl Acad Sci U S A. 2015 Apr 14;112(15):4606-11. doi: 10.1073/pnas.1503890112. Epub 2015 Mar 30.

Environmental tipping points significantly affect the cost-benefit assessment of climate policies.

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Becker Friedman Institute, University of Chicago, Chicago, IL 60637; Hoover Institution, Stanford, CA 94305;
Hoover Institution, Stanford, CA 94305;
Earth System Science, College of Life and Environmental Sciences, University of Exeter, Exeter EX4 4QE, United Kingdom;
Department of Business Administration, University of Zurich, Zurich 8044, Switzerland;
Japan International Cooperation Agency (JICA) Research Institute, Tokyo 162-8433, Japan; and Kiel Institute for the World Economy, Kiel 24105, Germany


Most current cost-benefit analyses of climate change policies suggest an optimal global climate policy that is significantly less stringent than the level required to meet the internationally agreed 2 °C target. This is partly because the sum of estimated economic damage of climate change across various sectors, such as energy use and changes in agricultural production, results in only a small economic loss or even a small economic gain in the gross world product under predicted levels of climate change. However, those cost-benefit analyses rarely take account of environmental tipping points leading to abrupt and irreversible impacts on market and nonmarket goods and services, including those provided by the climate and by ecosystems. Here we show that including environmental tipping point impacts in a stochastic dynamic integrated assessment model profoundly alters cost-benefit assessment of global climate policy. The risk of a tipping point, even if it only has nonmarket impacts, could substantially increase the present optimal carbon tax. For example, a risk of only 5% loss in nonmarket goods that occurs with a 5% annual probability at 4 °C increase of the global surface temperature causes an immediate two-thirds increase in optimal carbon tax. If the tipping point also has a 5% impact on market goods, the optimal carbon tax increases by more than a factor of 3. Hence existing cost-benefit assessments of global climate policy may be significantly underestimating the needs for controlling climate change.


carbon tax; climate change; ecosystem; relative price effect; tipping point

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