Paper Number: 2014-04

Document Date: 03/18/2014

Author(s): Alex L. Marten

Subject Area(s): Economic Damages/Benefits; Climate Change

JEL Classification: Environmental Economics: Valuation of Environmental Effects; Climate; Natural Disasters and Their Management; Global Warming

Keywords: social cost of carbon; integrated assessment; scenario uncertainty

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.

This paper is part of the Environmental Economics Working Paper Series. 

• The Role of Scenario Uncertainty in Estimating the Benefits of Carbon Mitigation (PDF)(31 pp, 431 K, 03/18/2014)