ABSTRACT
Market signals are essential for the deployment of new technologies. However, market signals can be derailed by uncertainties in climate science that can lead to potentially radical corrections of climate policy. Signals can also be distorted by price volatility related to short-term fluctuations in the carbon market. Martin Weitzman has distinguished between these two types of unknowns.1 According to Weitzman, the term “risk” implies a situation in which the probability of various outcomes is known, while “uncertainty” refers to a more profound lack of knowledge in which even the probabilities are unknown.2 By this definition we can use the term “risk” to describe volatility associated with business cycles, market noise, and similar factors that might influence carbon price behavior. “Uncertainty” is more appropriate in referring to gaps in our knowledge of the science behind climate change that, through policy, may also have profound effects on carbon prices.
