[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).
Four steps in estimating the consequences of CO2 emissions
This section based on Greenstone et. al. 2013
IAMS combine insights from science and economics
Emissions $\rightarrow$GHG concentrations $\rightarrow$Temperature $\rightarrow$Economic Damages
Come at the cost of simplification
All three models:
What will baseline emissions look like?
Climate sensitivity parameter = average surface warming resulting from a doubling of CO2, in equilibrium
There is enormous uncertainty in these models
Even if temp and climate changes are known, how will societies react?
sea level rise
internal and external displacement
This section based on Nordhaus 2011
In these situations, the shape/ tail of the distribution matters more than the mean
Standard deviation "sigma" captures the likelihood of tail outcomes
Typically think in terms of normal distribution:
Example: height of US women is well approximated by a normal distribution with mean 64 inches and s.d. of 3 inches
Although we're conditioned to think of the normal distribution, we have experienced enough costly 4 or 5 sigma events to know that other distributions must be considered
Example: US stock prices fell 23% on October 19, 1987
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
Why does this matter?
When the probability of infinite damages is nonzero, the expected BCA framework breaks down
Even a small possibility of infinite damages causes us to spend infinite amount on abatement today
Uncertainty much more worrisome than risk
Introspection and experience tells use that extremely costly events may be more likely than we think
Yet the prospect of extinction invalidates the BCA exercise
Neither approach totally satisfying
Economics is still trying to figure out the way forward
Global SCC Estimates by Model (2007$/ton CO2)
We discussed measuring benefits earlier in the course
How would you go about applying that in this context?
What is the "right" discount rate to use?
Two reasons to discount across generations:
Ramsey (1928) inter-generational discount rate formula:
$\rho$ is the pure rate of time preference
$g$ is the growth in per capita consumption ($g\approx2\%$)
$\eta$ is the absolute value of the marginal utility of consumption
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