Skip to main content
Article thumbnail
Location of Repository

Environmental prices, uncertainty and learning

By Simon Dietz and Samuel Fankhauser


There is an increasing demand for putting a shadow price on the environment to guide public policy and incentivise private behaviour. In practice, setting that price can be extremely difficult as uncertainties abound. There is often uncertainty not just about individual parameters but about the structure of the problem and how to model it. A further complication is the second-best nature of real environmental policy making. In this paper, we propose some practical steps for setting prices in the face of these difficulties, drawing on the example of climate change. We consider how to determine the overall target for environmental protection, how to set shadow prices to deliver that target, and how we can learn from the performance of policies to revise targets and prices. Perhaps most significantly, we suggest that estimates of the marginal cost of environmental protection, rather than the marginal benefit, will often provide the more consistent and robust prices for achieving targets

Topics: GE Environmental Sciences, HC Economic History and Conditions
Publisher: Centre for Climate Change Economics and Policy and Grantham Research Institute on Climate Change and the Environment
Year: 2009
OAI identifier:
Provided by: LSE Research Online

Suggested articles


  1. (2006). A General, Analytic Method for Generating Robust Strategies and Narrative Scenarios " doi
  2. (2008). A Question of Balance: Weighing the Options on Global Warming Policies. New Haven and London, doi
  3. (1921). A Treatise on Probability. doi
  4. (2008). An econometric analysis of emission allowance prices." doi
  5. (2009). Assessing dangerous climate change through an update of the Intergovernmental Panel on Climate Change (IPCC) “reasons for concern”." doi
  6. (2007). Automobile externalities and policies." doi
  7. (1996). Blueprint 5: the True Costs of Road Transport. doi
  8. (2009). Building a low-carbon economy: the inaugural report of the UK Committee on Climate Change." doi
  9. (2008). Building a low-carbon economy: the UK's contribution to tackling climate change. London, The Stationery Office.
  10. (2009). Carbon Markets in Time and Space. Background Paper for the Lazerowicz Review. London, Department of Energy and Climate Change.
  11. (2001). Catastrophic shifts in ecosystems." doi
  12. (2005). Climate Policy Design Under Uncertainty. Discussion Paper 05-44. Washington, D.C., Resources for the Future.
  13. (2007). Confidence, uncertainty and decision-support relevance in climate predictions." doi
  14. (2006). Cost-Benefit Analysis and the Environment. doi
  15. (2005). Does Britain or the United States have the right gasoline tax?" doi
  16. (1975). Economic Analysis of Projects. doi
  17. (2005). Ecosystems and Human Wellbeing: Synthesis.
  18. (2008). Environmental Modelling: an Uncertain Future.
  19. (1974). Environmental preservation, uncertainty and irreversibility." doi
  20. (2002). Estimating the social cost of carbon emissions. Government Economic Service Working Paper 140. London, HM Treasury.
  21. (1997). Global warming, irreversibility and learning." doi
  22. (2005). Integrated assessment models. Climate-Change Policy. doi
  23. (1974). Investment decisions under uncertainty: the irreversibility effect."
  24. (2007). Issues related to mitigation in the long term context Climate Change 2007: Mitigation. Contribution of Working Group III to the Fourth Assessment Report of the Inter-governmental Panel on Climate Change. doi
  25. (1982). Judgement Under Uncertainty: Heuristics and Biases. Cambridge, doi
  26. (1996). Learning and stock externalities in environmental regulations: the case of greenhouse gas emissions." doi
  27. (2009). Marginal abatement costs of carbon-dioxide emissions: a metaanalysis." doi
  28. (2000). Markets for Clean Air, The US Acid Rain Program. Cambridge, doi
  29. (2009). On modeling and interpreting the economics of catastrophic climate change." doi
  30. (1952). On the Theory of Economic Policy. doi
  31. (2007). Optimal taxation and cross-price effects on labor supply: estimates of the optimal gas tax." doi
  32. (2005). Payments for Environmental Services: Some Nuts and Bolts.
  33. (2009). Rapport de la Conférence des Experts et de la Table Ronde sur la Contribution Climat et Énergie. Paris, Ministere de l'Ecologie, de l'Energie, du Developpement Durable et de la Mer, de l'Economie, de l'Industrie et de l'Emploi.
  34. (2006). Regulating by prices, quantities, or both: a review of instrument choice." doi
  35. (2003). Report on Modelling and Forecasting at the Bank of England. Quarterly Bulletin.
  36. (1961). Risk, ambiguity and the Savage axiom." doi
  37. (1921). Risk, Uncertainty and Profit. doi
  38. (2002). Silver Bullet or Fools’ Gold? A Global Review of Markets for Forest Environmental Services and their Impact on the Poor. London,
  39. (1997). SO2 allowance trading: how do expectations and experience measure up?" doi
  40. (2001). Summary for Policymakers. Climate Change doi
  41. (1997). The aggregation of climate change damages: a welfare theoretic approach."
  42. (1920). The Economics of Welfare. doi
  43. (2008). The European Carbon Market in Action. Lessons from the First Trading Period. doi
  44. (2006). The marginal impact of CO2 from PAGE2002: an integrated assessment model incorporating the IPCC's five reasons for concern."
  45. (2007). The Social Cost of Carbon and the Shadow Price of Carbon: What They Are and How to Use Them in Economic Appraisal in the UK. London, Department for the Environment, Food and Rural Affairs.
  46. (2007). The social cost of carbon: trends, outliers and catastrophes. doi
  47. (2008). The social cost of carbon: valuation estimates and their use in UK policy."
  48. (2003). The social cost of carbon."
  49. (1996). The Social Costs of Climate Change: Greenhouse Damage and the Benefits of Control.
  50. (2006). The transition to endogenous technical change in climateeconomy models: a technical overview to the Innovation Modeling Comparison Project." doi
  51. (2009). The UK's carbon targets for 2020 and the role of the Committee on Climate Change. Building a Low-Carbon Future: the Politics of Climate Change. doi
  52. (2005). Uncertainty and climate-change policy. Climate-Change Policy. doi
  53. (2007). Uncertainty in environmental economics." doi
  54. (1998). What have we learned from the grand policy experiment? Positive and normative lessons from SO2 allowance trading." doi
  55. (2009). What is the "damages function" for global warming and what difference might it make?, doi
  56. (1997). What is the value of scientific knowledge? An application to global warming using the PRICE model." doi
  57. (2008). Why economic analysis supports strong action on climate change: a response to the Stern Review's critics." doi

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.