The Equity-Adjusted Social Cost of Carbon

We derive a tractable formula for the social cost of carbon (SCC) that accounts for both intra- and intergenerational inequality and for macroeconomic uncertainty, including the risk of rare macroeconomic disasters. We allow for three separate parameters of inequity aversion, and the possibility of different schedules on whom costs and benefits fall in the income distribution. If inequality is expected to decrease over time, the SCC is lower than if inequality remained constant. For our baseline calibration we obtain an SCC of $47 (201)/tCO2 under decreasing (increasing) inequality over time, compared to a value of $83/tCO2 under constant inequality. Taking into account who bears the costs and damages across individuals — by allowing climate change to shape the path of inequality through income-dependent damages and costs — our central estimate becomes $82/tCO2 ($148/tCO2) with continued convergence (divergence) of incomes.