Social cost of carbon under endogenous social adaptation

Adaptation measures are crucial for curbing climate change and will change the assessment of economic damages from climate change. The social cost of carbon (SCC), the expected present value of marginal damage due to additional carbon emissions, is bound to be affected and the related estimates require further identification. We study the SCC under endogenous social adaptation (a combo of households and firm’s adaptation spendings) to provide new view for SCC estimation and to reduce the debates of practicing climate adaptation measures. We construct a DSGE (dynamic stochastic general equilibrium) model with dynamic energy prices under endogenous social adaptation. We found that: (1) Social adaptation will reduce the SCC. Optimal social adaptation is a combination of increased adaptation spending by households and firms with lower ratio of GDP and welfare losses. (2) Low carbon stocks, less convexity of damage function, and increased extraction costs of fossil fuel will reinforce the role of social adaptation. Higher elasticity of adaptive spendings, more climate risks and adaptive spendings all improve the role of social adaptation, leading to lower SCC. Our findings aid in estimating carbon prices and practicing climate adaptation measures.