A RAPID ASSESSMENT MODEL FOR UNDERSTANDING THE SOCIAL COST OF CARBON

The "social cost of carbon" (SCC) is the present value of the stream of future damages from one additional unit of carbon emissions in a particular year. This paper develops a rapid assessment model for the SCC. The model includes the essential ingredients for calculating the SCC at the global scale and is designed to be transparent and easy to use and modify. Our goal is to provide a tool to help analysts and decision-makers quickly explore the implications of various modeling assumptions for the SCC. We use the model to conduct sensitivity analyses over some of the key input parameters, and we compare estimates of the SCC under certainty and uncertainty in a Monte Carlo analysis. We find that, due to the combined effects of uncertainty and risk aversion, the certainty-equivalent SCC can be substantially larger than the expected value of the SCC. In our Monte Carlo simulation, the certainty-equivalent SCC is more than four times larger than the expected value of the SCC, and we show that this result depends crucially on how the uncertain preference parameters are handled. We also compare the approximate present value of benefits estimated using the SCC to the exact value of compensating variation in the initial period for a wide range of hypothetical emission reduction policies.

Download Full-text

CALCULATING THE SOCIAL COSTS OF CARBON WITHOUT KNOWING PREFERENCES COMMENT ON "A RAPID ASSESSMENT MODEL FOR UNDERSTANDING THE SOCIAL COST OF CARBON"

Climate Change Economics ◽

10.1142/s2010007814500043 ◽

2014 ◽

Vol 05 (02) ◽

pp. 1450004 ◽

Cited By ~ 1

Author(s):

REYER GERLAGH

Keyword(s):

Social Cost ◽

Rapid Assessment ◽

Expected Value ◽

Social Costs ◽

Assessment Model ◽

Uncertain Parameters ◽

Social Cost Of Carbon ◽

Welfare Gain ◽

The Social ◽

Very High

The Social Costs of Carbon (SCC) equals the marginal welfare loss associated with one unit of emitted CO 2, divided by the marginal welfare gain associated with one unit of consumption. In stochastic assessments, both the nominator and denominator can depend on uncertain parameters; specifically they depend on the (implicit) scaling of the welfare function with the parameters. I discuss some pitfalls when calculating the expected value or the certainty equivalent of the SCC, and show that a mistaken procedure easily leads to very high or very low estimates for the SCC. I use the paper by Newbold et al. (2013) as an illustration.

Download Full-text

FURTHER COMMENT ON "A RAPID ASSESSMENT MODEL FOR UNDERSTANDING THE SOCIAL COST OF CARBON"

Climate Change Economics ◽

10.1142/s2010007814500055 ◽

2014 ◽

Vol 05 (02) ◽

pp. 1450005 ◽

Cited By ~ 1

Author(s):

STEPHEN C. NEWBOLD ◽

CHARLES GRIFFITHS ◽

CHRIS MOORE ◽

ANN WOLVERTON ◽

ELIZABETH KOPITS

Keyword(s):

Social Cost ◽

Rapid Assessment ◽

Assessment Model ◽

Certainty Equivalent ◽

Capita Consumption ◽

Reference Level ◽

Social Cost Of Carbon ◽

Measurement Units ◽

Per Capita ◽

Per Capita Consumption

In this reply to the comment by Gerlagh, we confirm an error in our estimate of the certainty-equivalent social cost of carbon (SCC) reported in Newbold et al. (2013), and we discuss the underlying conceptual difficulties that arise in conducting a social welfare analysis when preferences are heterogeneous or uncertain. The certainty-equivalent SCC depends crucially on the reference level of per capita consumption used to normalize marginal utility across possible preference parameters, and our estimate of the certainty-equivalent SCC was driven largely by an arbitrary choice of measurement units. All other results from our rapid assessment model are based on the deterministic SCC or its simulated probability distribution, which does not depend on the reference level of per capita consumption.

Download Full-text

The Risk-Adjusted Carbon Price

The American Economic Review ◽

10.1257/aer.20180517 ◽

2021 ◽

Vol 111 (9) ◽

pp. 2782-2810

Author(s):

Ton S. Van den Bremer ◽

Frederick Van der Ploeg

Keyword(s):

Perturbation Theory ◽

Climate Sensitivity ◽

Social Cost ◽

Carbon Price ◽

Numerical Results ◽

Social Cost Of Carbon ◽

Economic Risk ◽

Present Value ◽

Analytical Results ◽

The Social

The social cost of carbon is the expected present value of damages from emitting one ton of carbon today. We use perturbation theory to derive an approximate tractable expression for this cost adjusted for climatic and economic risk. We allow for different aversion to risk and intertemporal fluctuations, skewness and dynamics in the risk distributions of climate sensitivity and the damage ratio, and correlated shocks. We identify prudence, insurance, and exposure effects, reproduce earlier analytical results, and offer analytical insights into numerical results on the effects of economic and damage ratio uncertainty and convex damages on the optimal carbon price. (JEL E12, G22, H23, O44, Q35, Q51, Q54)

Download Full-text

Tipping Points in the Climate System and the Economics of Climate Change

10.5194/egusphere-egu2020-2959 ◽

2020 ◽

Author(s):

James Rising ◽

Simon Dietz ◽

Thomas Stoerk ◽

Gernot Wagner

Keyword(s):

Climate Change ◽

Economic Impact ◽

Social Cost ◽

Economic Impacts ◽

Tipping Point ◽

Assessment Model ◽

Tipping Points ◽

Social Cost Of Carbon ◽

The Social ◽

Impacts Of Climate Change

<div>Tipping points in the climate system are a key determinant of future impacts from climate change. Current consensus estimates for the economic impact of greenhouse gas emissions, however, do not yet incorporate tipping points.&#160;The last decade has, at the same time, seen publication of over 50 individual research papers on how tipping points affect the economic impacts of climate change. These papers have typically incorporated an individual tipping point into an integrated climate-economy assessment model (IAM) such as DICE to study how the the tipping point affects economic impacts of climate change such as the social cost of carbon (SC-CO2). This literature, has, however, not yet been synthesized to study the joint effect of the large number of tipping points on the SC-CO2. SC-CO2 estimates currently used in climate policy are therefore too low, and they fail to reflect the latest research.</div><div><br><div>This paper brings together this large and active literature and proposes a way to jointly estimate the impact of tipping points. In doing so, we bridge an important gap between climate science and climate economics. To do so, we develop a&#160;new integrated assessment model with frontier characteristics: a tractable geophysical module for each tipping point, damage functions based on recent climate econometric advances, and disaggregated climate change impacts at the national level, including from sea-level rise. In this model, we consider the following tipping points: the permafrost carbon feedback, the dissociation of ocean methane hydrates,&#160;Amazon forest dieback,&#160;the disintegration of the Greenland ice sheet,&#160;the disintegration of the West Antarctic ice sheet, the slowdown of the Atlantic Meridional Overturning Circulation, changed patterns of the India summer monsoon, and changes in surface albedo feedback (also referred to as Arctic sea-ice loss).</div> <div>&#160;</div> Our preliminary findings show that the geophysical tipping points tend to increase the economic impact of climate change, with a combined effect of increasing the social cost of carbon (SC-CO2) by 14%-43%. The largest contributions to this increase come from methane-related tipping points.</div>

Download Full-text