Climate Risk Price and Carbon Price

Faced with the global externality of climate change, there is a strong consensus among academic economists in favor of the price instrument to internalize an externality and to support by means of a tax a universal carbon price, because of the global nature of the climate externality. However, given the very strong long-term uncertainties on climate dynamics, on green technological progress, on the credibility of the commitments of the different countries, on economic growth and therefore on the evolution of emissions, the determination of this price is still a huge challenge for climate economists today. It is a question of valuing present actions generating a flow of economic and environmental benefits, which is very complicated in this context. In this article, I offer a synthesis of my recent work on the subject by presenting the two possible methods: the cost-benefit approach in which the price of carbon is the present value of the flow of damage avoided by reducing the current emissions of ‘a tonne of CO₂ and the cost-effectiveness approach in which a CO₂ budget for the century is fixed a priori, the price of carbon being the dual variable of this climate constraint.