The social cost of carbon should be risk-averse because climate change poses significant risks to society and the environment, and the costs and impacts of these risks are uncertain and potentially catastrophic.
A risk-averse approach to the social cost of carbon takes into account the possibility of extreme, high-impact events, such as widespread famine, displacement of populations, and irreversible damage to ecosystems. By incorporating this uncertainty and potential for extreme events into the calculation of the social cost of carbon, policymakers can ensure that carbon pricing policies are designed to adequately mitigate the risks of climate change.
For example, a risk-averse approach may involve using a lower discount rate, which places greater emphasis on the impacts of future generations and ensures that the full costs of climate change are taken into account. This would lead to a higher social cost of carbon, which would in turn lead to a more ambitious carbon pricing policy.
Overall, a risk-averse approach to the social cost of carbon acknowledges the significant risks and uncertainties associated with climate change, and ensures that carbon pricing policies are designed to adequately address these risks and promote a more sustainable and resilient future.