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A Simple Formula for the Social Cost of Carbon

Author

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  • Inge van den Bijgaart

    (Department of Economics, CentER, TSC, Tilburg University, The Netherlands)

  • Reyer Gerlagh

    (Department of Economics, CentER, TSC, Tilburg University, The Netherlands)

  • Luuk Korsten

    (Tilburg University, The Netherlands)

  • Matti Liski

    (School of Economics, Aalto University, Finland)

Abstract

The social cost of carbon (SCC), commonly referred to as the carbon price, is the monetized damage from emitting one unit of CO2 to the atmosphere. The SCC is typically obtained from large-scale computational Integrated Assessment Models (IAMs) that consolidate interdisciplinary climate research inputs to obtain a carbon price estimate relevant for policy-making. However, the climate economy interactions of IAMs remain inaccessible to scientists in general. Here we develop a simple closed-form formula that captures the key physical and economic determinants of the SCC in the IAMs. For a mainstream IAM, it explains over 99 percent of the within-model variation originating from structural uncertainties; in an inter-model comparison, the structural variation captured by the formula matches closely a SCC distribution of previous SCC estimates. The precise replication of the SCC estimates is strikingly free of details such as those on future policy and technology options, or even carbon concentration levels; the size of the current economy and the emissions-temperature-damage response are the dominant SCC determinants in the IAMs. The structural interpretation given allows decision-makers to disentangle the subjective and structural determinants of the carbon price. Structural uncertainties alone lead to a strongly right-skewed density with median 15 €/tCO2, mean 31 €/tCO2, and more than 5 percent probability for higher than 100 €/tCO2 for year 2015.

Suggested Citation

  • Inge van den Bijgaart & Reyer Gerlagh & Luuk Korsten & Matti Liski, 2013. "A Simple Formula for the Social Cost of Carbon," Working Papers 2013.83, Fondazione Eni Enrico Mattei.
  • Handle: RePEc:fem:femwpa:2013.83
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    References listed on IDEAS

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. The social cost of carbon in one equation
      by Economic Logician in Economic Logic on 2013-12-03 21:45:00

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    Cited by:

    1. Havranek, Tomas & Irsova, Zuzana & Janda, Karel & Zilberman, David, 2015. "Selective reporting and the social cost of carbon," Energy Economics, Elsevier, vol. 51(C), pages 394-406.
    2. Richard S. J. Tol, 2015. "Economic impacts of climate change," Working Paper Series 7515, Department of Economics, University of Sussex.
    3. van den Bijgaart, Inge & Gerlagh, Reyer & Liski, Matti, 2016. "A simple formula for the social cost of carbon," Journal of Environmental Economics and Management, Elsevier, vol. 77(C), pages 75-94.
    4. van der Ploeg, Frederick & Rezai, Armon, 2017. "Cumulative emissions, unburnable fossil fuel, and the optimal carbon tax," Technological Forecasting and Social Change, Elsevier, pages 216-222.
    5. Motavasseli, Ali, 2016. "Essays in environmental policy and household economics," Other publications TiSEM b32e287e-169b-4e89-9878-1, Tilburg University, School of Economics and Management.
    6. Simon Dietz & Christian Gollier & Louise Kessler, 2015. "The climate beta," GRI Working Papers 190, Grantham Research Institute on Climate Change and the Environment.
    7. Gerlagh, Reyer, 2017. "Generous Sustainability," Ecological Economics, Elsevier, vol. 136(C), pages 94-100.
    8. Gerlagh, Reyer & Jaimes, Richard & Motavasseli, Ali, 2017. "Global demographic change and climate policies," Discussion Paper 2017-035, Tilburg University, Center for Economic Research.
    9. van den Bijgaart, Inge, 2016. "Essays in environmental economics and policy," Other publications TiSEM 298bee2a-cb08-4173-9fe1-8, Tilburg University, School of Economics and Management.
    10. Kollenbach, Gilbert, 2017. "On the optimal accumulation of renewable energy generation capacity," Journal of Economic Dynamics and Control, Elsevier, vol. 77(C), pages 157-179.
    11. Perino, Grischa & Willner, Maximilian, 2016. "Procrastinating reform: The impact of the market stability reserve on the EU ETS," Journal of Environmental Economics and Management, Elsevier, vol. 80(C), pages 37-52.
    12. Armon Rezai & Frederick Van der Ploeg, 2016. "Intergenerational Inequality Aversion, Growth, and the Role of Damages: Occam's Rule for the Global Carbon Tax," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, pages 493-522.
    13. repec:eee:foreco:v:26:y:2017:i:c:p:9-29 is not listed on IDEAS
    14. Rick Van der Ploeg & Armon Rezai, 2015. "Intergenerational Inequality Aversion, Growth and the Role of Damages: Occam's rule for the global tax," Economics Series Working Papers OxCarre Research Paper 15, University of Oxford, Department of Economics.
    15. Rick van der Ploeg, 2017. "The Safe Carbon Budget," CESifo Working Paper Series 6620, CESifo Group Munich.
    16. Roland Hodler, Anna Bruderle, 2017. "The effect of oil spills on infant mortality," OxCarre Working Papers 196, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.

    More about this item

    Keywords

    Climate Change; Carbon Price; Integrated Assessment Models; Uncertainty;

    JEL classification:

    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects

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