A shapley value approach to pricing climate risks

Roger M Cooke

Research output: Contribution to journalArticle

Abstract

This paper prices the risk of climate change by calculating a lower bound for the price of a virtual insurance policy against climate risks associated with the business as usual (BAU) emissions path. In analogy with ordinary insurance pricing, this price depends on the current risk to which society is exposed on the BAU emissions path and on a second emissions path reflecting risks that society is willing to take. The difference in expected damages on these two paths is the price which a risk neutral insurer would charge for the risk swap excluding transaction costs and profits, and it is also a lower bound on society's willingness to pay for this swap. The price is computed by (1) identifying a probabilistic risk constraint that society accepts, (2) computing an optimal emissions path satisfying that constraint using an abatement cost function, (3) computing the extra expected damages from the business as usual path, above those of the risk constrained path, and (4) apportioning those excess damages over the emissions per ton in the various time periods. The calculations follow the 2010 US government social cost of carbon analysis, and are done with DICE2009.
LanguageEnglish
Number of pages18
JournalEconomics Discussion Paper
Issue number2011-17
DOIs
Publication statusPublished - 14 Jun 2011

Fingerprint

Pricing
Shapley value
Climate
Damage
Swaps
Lower bounds
Risk society
Insurance
Carbon
Willingness-to-pay
Transaction costs
Insurance pricing
Government
Climate change
Social costs
Abatement costs
Charge
Profit
Insurer
Cost function

Keywords

  • climate change
  • climate risks
  • virtual insurance
  • carbon analysis

Cite this

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A shapley value approach to pricing climate risks. / Cooke, Roger M.

In: Economics Discussion Paper, No. 2011-17, 14.06.2011.

Research output: Contribution to journalArticle

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