Global Climate Change Part II
Social Cost of Carbon

[Econ 2277](
[Prof. Richard L. Sweeney](

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UN Report suggests putting a high price on carbon


Source: IPCC 2018 Figure 2.26

Say we wanted to use a price instrument, what is the right tax?

[Note: How is this different from IPCC graph]

In 2009 the US formed an inter-agency working group (IAWG) to come up with a number for the social cost of carbon (SCC).

How much should we pay to reduce CO2 by one ton today?

Four steps in estimating the consequences of CO2 emissions

  1. the future emissions of GHGs
  2. the effect of past and future emissions on climate
  3. the impact of changes in climate on the physical and biological environment
  4. translation of those impacts into economic damages

This section based on Greenstone et. al. 2013

Integrated assessment models (IAMs)


Three IAMs used by the US IAWG

Common IAM features

All three models:

Step 1: Predicting baseline

Step 2: Map emissions to climate changes

Climate sensitivity parameter = average surface warming resulting from a doubling of CO2, in equilibrium


There is enormous uncertainty in these models

Source: Heal and Miller 2014

Note: Socioeconomic responses also very uncertain

Even if temp and climate changes are known, how will societies react?

The economic importance of tail events

This section based on Nordhaus 2011


In these situations, the shape/ tail of the distribution matters more than the mean

Skinny vs. fat tails

Example: height of US women is well approximated by a normal distribution with mean 64 inches and s.d. of 3 inches

Multi-sigma events

Alternative Distributions Exist

Example: Earthquakes

Implication: If things are normally distributed, we will never really be that surprised. However, if the problem has fat tails, we may experience surprise shocks orders of magnitude larger than anything we’ve every experienced before

Policy choice and fat tails

Why does this matter?

Is this challenge unique to climate change?

Example: Strangelets

Uncertainty summary

Global SCC Estimates by Model (2007$/ton CO2) title_img_1row

Step 3: Mapping Temperature to Damages

How would you go about doing this?






We also need to put all this in present value terms

What is the “right” discount rate to use?

Two reasons to discount across generations:

  1. we value current generation more
  2. future generations will be better off

Ramsey (1928) inter-generational discount rate formula:

These yield discount rates between 0 and 9\%!


Discount rate wrapup

Question: Why don’t we invest in capital markets now, earn those returns, and then use that money to abate the carbon problem later?

Put differently: We are going to leave a stock of capital to our children. Should we invest in the market or invest in carbon abatement?

Many social investments involve large up front costs and long term benefits

Model Comparison


SCC estimates by discount rate


Required Readings

Stavins 2013
IPCC Special Report [link]
US 4th National Assessment [link]