Paper Number: 2010-07

Document Date: 08/2010

Author(s): Stephen Newbold, Charles Griffiths, Chris Moore, Ann Wolverton, and Elizabeth Kopits

Subject Area(s): Climate Change; Benefit-Cost Analysis

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

Keywords: climate change; social cost of carbon; integrated assessment model

Abstract: The “social cost of carbon” (SCC) is the present value of the future damages from one additional unit of carbon emissions in a particular year. This paper develops a simple model for calculating the social cost of carbon. The model includes the essential ingredients for calculating the SCC at the global scale, and is designed to be transparent and easy to use by decision-makers and non-specialists. We use the model to compare estimates of the SCC under certainty and uncertainty in a Monte Carlo analysis. We find that, due to the combined effects of uncertainty and risk aversion, the certainty-equivalent SCC can be substantially larger than the expected value of the SCC. In our Monte Carlo simulation, the certainty-equivalent SCC corresponds to the 97th percentile of the simulated probability distribution of the deterministic SCC. We also compare the approximate present value of benefits estimated using the SCC to the exact value of compensating variation in the initial period for a wide range of hypothetical emission reduction policies.

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

• The “Social Cost of Carbon” Made Simple (PDF)(44 pp, 717 K, 08/2010)