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Beneath the trees: the influence of natural capital on shadow price dynamics in a macroeconomic model with uncertainty

Author

Listed:
  • Benmir, Ghassane
  • Mori, Aditya
  • Roman, Josselin
  • Tarsia, Romano

Abstract

We investigate the impact of incorporating natural capital dynamics on optimal allocation in an economy subject to uncertainty. We present new estimates on climate damages to natural capital and elasticities of substitution between natural capital and other production inputs. Using these estimates, we examine how shadow prices vary across model specifications and parameter calibrations. Our findings indicate that the social cost of carbon is 12 percent higher in a model incorporating natural capital compared to a standard DICE-type model. Furthermore, the social cost of carbon is highly sensitive to the elasticity of substitution in the final output production f unction. Accounting f or t he stochastic nature of productivity further increases the social cost of carbon by 0.13 percent to 39 percent, depending on the inclusion of habit formation.

Suggested Citation

  • Benmir, Ghassane & Mori, Aditya & Roman, Josselin & Tarsia, Romano, 2025. "Beneath the trees: the influence of natural capital on shadow price dynamics in a macroeconomic model with uncertainty," LSE Research Online Documents on Economics 128516, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:128516
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    More about this item

    Keywords

    natural capital; shadow prices; social cost of carbon; uncertainty;
    All these keywords.

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General

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