The social cost of carbon emissions: Seven propositions
AbstractDetermining the social cost of carbon emissions (SCC) is a crucial step in the economic analysis of climate change policy as the US government’s recent decision to use a range of estimates of the SCC centered at $77/tC (or, equivalently, $21/tCO2) in cost-benefit analyses of proposed emission-control legislation underlines. This note reviews the welfare economics theory fundamental to the estimation of the SCC in both static and intertemporal contexts, examining the effects of assumptions about the typical agent’s pure rate of time preference and elasticity of marginal felicity of consumption, production and mitigation technology, and the magnitude of climate-change damage on estimates of the SCC. We highlight three key conclusions: (i) an estimate of the SCC is conditional on a specific policy scenario, the details of which must be made explicit for the estimate to be meaningful; (ii) the social discount rate relevant to intertemporal allocation decisions also depends on the policy scenario; and (iii) the SCC is uniquely defined only for policy scenarios that lead to an efficient growth path because marginal costs and benefits of emission–mitigation diverge on inefficient growth paths. We illustrate these analytical conclusions with simulations of a growth model calibrated to the world economy.
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Bibliographic InfoArticle provided by Elsevier in its journal Economics Letters.
Volume (Year): 121 (2013)
Issue (Month): 1 ()
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Web page: http://www.elsevier.com/locate/ecolet
Climate change; Cost-benefit analysis; Climate policy; Carbon price; Scenario-dependent discounting;
Find related papers by JEL classification:
- D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
- Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters
- Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Costs; Distributional Effects; Employment Effects
- H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- D62 - Microeconomics - - Welfare Economics - - - Externalities
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
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