The Social Cost of Carbon with Economic and Climate Risk

Friday, December 1, 2017

Economics Working Paper 18113

Abstract: There is great uncertainty about both future economic and future climate conditions; uncertainty that substantially affect the choice of policies for managing interactions between the climate and the economy. A critical index of this interaction is the social cost of carbon (SCC)—that is, the present value of the marginal damage to economic output caused by carbon emissions. We show that SCC is substantially affected by both economic risks, such as shocks to growth rates, and climate risks, such as irreversible changes in sea levels. Moreover, SCC is itself a stochastic process with significant variation, a factor of substantial importance in evaluating any decision with a real option dimension. Furthermore, we have only imprecise information about what parameter values best approximate reality. Our response is to examine a plausible but wide range of values for critical parameters and find results that are robust. More generally, this work shows that large-scale computing makes it possible to analyze policies in models substantially more complex and realistic than usually used in the integrated assessment models literature.

DOWNLOAD: The Social Cost of Carbon with Economic and Climate Risk.pdf