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High unknowability of climate damage valuation means the social cost of carbon will always be disputed


  • John C. V. Pezzey

    (Fenner School of Environment and Society, The Australian National University)


The social cost of carbon (SCC), a carbon price calculated from cost-benefit based integrated assessment models and used to inform some climate policies, will always be highly disputed, partly because a key model assumption, the centennial climate damage valuation function (CDF), will "always" be highly unknowable. Current disputes are highlighted here by the huge range of SCCs resulting from alternative values of key parameters like discount rates, climate sensitivity and the CDF; by the implausibility to climate scientists of a leading model's warming projections; and by strong criticisms of mainstream CDFs by many climate economists. The claim that statistical analyses of "weather" impacts on local economies can improve centennial CDFs rests on untestable out-of-sample extrapolation. Compared to astronomy, geology and other earth sciences, prediction testing in climate science is generally harder because of Earth's uniqueness, and the unprecedented range and speed of likely centennial climate change, but stable underlying laws make modelling based on past observations meaningful. By contrast, the added complexity of human behaviour means there are no reliable laws for modelling centennial CDFs. For this reason alone, SCCs will always be disputed. I suggest instead more use of carbon prices based on marginal abatement costs, computed on cost-effective paths that achieve socially agreed, physical climate targets. Downplaying the SCC approach to carbon prices poses challenges to many economists, and a cost-effectiveness approach is no panacea, but it avoids the illusion of optimality, and allows more detailed analysis of many current climate policies.

Suggested Citation

  • John C. V. Pezzey, 2018. "High unknowability of climate damage valuation means the social cost of carbon will always be disputed," CCEP Working Papers 1802, Centre for Climate Economics & Policy, Crawford School of Public Policy, The Australian National University.
  • Handle: RePEc:een:ccepwp:1802

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    Climate policy; cost-benefit analysis; global warming; centennial damage valuation; high unknowability; cost-effectiveness analysis;

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General

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