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The Role of Scenario Uncertainty in Estimating the Benefits of Carbon Mitigation

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  • Alex L. Marten

Abstract

The benefits of carbon mitigation are subject to numerous sources of uncertainty and accounting for this uncertainty in policy analysis is crucial. One often overlooked source uncertainty are the forecasts of future baseline conditions (e.g., population, economic output, emissions) from which carbon mitigation benefits are assessed. Through,in some cases highly non-linear relationships, these baseline conditions determine the forecast level and rate of climate change, exposed populations, vulnerability, and way in which inter-temporal tradeoffs are valued. We study the impact of explicitly considering this uncertainty on a widely used metric to assess the benefits of carbon dioxide mitigation, the social cost of carbon (SCC). To explore this question a detailed integrated assessment that couples economic and climate systems to assess the damages of climate change is driven by a library of consistent probabilistic socioeconomic-emission scenarios developed using a comprehensive global computable general equilibrium model. We find that scenario uncertainty has a significant effect on estimates of the SCC and that excluding this source of uncertainty could lead to an underestimate of the mitigation benefits. A detailed decomposition finds that this effect is driven primarily through the role that uncertainty regarding future consumption per capita growth has on the value of inter-temporal tradeoffs through the consumption discount rate.

Suggested Citation

  • Alex L. Marten, 2014. "The Role of Scenario Uncertainty in Estimating the Benefits of Carbon Mitigation," NCEE Working Paper Series 201404, National Center for Environmental Economics, U.S. Environmental Protection Agency, revised Mar 2014.
  • Handle: RePEc:nev:wpaper:wp201404
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    File URL: https://www.epa.gov/environmental-economics/working-paper-role-scenario-uncertainty-estimating-benefits-carbon
    File Function: First version, 2014
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    References listed on IDEAS

    as
    1. Marten, Alex L., 2011. "Transient temperature response modeling in IAMs: The effects of over simplification on the SCC," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 5, pages 1-42.
    2. Jean Fouré & Agnès Bénassy-Quéré & Lionel Fontagné, 2012. "The Great Shift: Macroeconomic projections for the world economy at the 2050 horizon," Working Papers 2012-03, CEPII research center.
    3. Enrica De Cian & Elisa Lanzi & Roberto Roson, 2007. "The Impact of Temperature Change on Energy Demand: A Dynamic Panel Analysis," Working Papers 2007.46, Fondazione Eni Enrico Mattei.
    4. Christian Gollier, 2008. "Discounting with fat-tailed economic growth," Journal of Risk and Uncertainty, Springer, vol. 37(2), pages 171-186, December.
    5. Robert E. Lucas, 2000. "Some Macroeconomics for the 21st Century," Journal of Economic Perspectives, American Economic Association, vol. 14(1), pages 159-168, Winter.
    6. Weitzman, Martin L., 1998. "Why the Far-Distant Future Should Be Discounted at Its Lowest Possible Rate," Journal of Environmental Economics and Management, Elsevier, vol. 36(3), pages 201-208, November.
    7. Adam Daigneault & Steve Newbold, 2009. "Climate Response Uncertainty and the Unexpected Benefits of Greenhouse Gas Emissions Reductions," NCEE Working Paper Series 200806, National Center for Environmental Economics, U.S. Environmental Protection Agency, revised Mar 2009.
    8. Martin L. Weitzman, 2009. "On Modeling and Interpreting the Economics of Catastrophic Climate Change," The Review of Economics and Statistics, MIT Press, vol. 91(1), pages 1-19, February.
    9. Stephen Newbold & Adam Daigneault, 2009. "Climate Response Uncertainty and the Benefits of Greenhouse Gas Emissions Reductions," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 44(3), pages 351-377, November.
    10. William D. Nordhaus, 2011. "Estimates of the Social Cost of Carbon: Background and Results from the RICE-2011 Model," NBER Working Papers 17540, National Bureau of Economic Research, Inc.
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    More about this item

    Keywords

    social cost of carbon; integrated assessment; scenario uncertainty;

    JEL classification:

    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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