A Discounting Rule for the Social Cost of Carbon
This paper proposes and demonstrates an approach to discounting to use in estimating the social cost of carbon when consumption growth is uncertain, as recommended by the National Academies of Sciences.
We develop a discounting rule for estimating the social cost of carbon (SCC) given uncertain economic growth. Diminishing marginal utility of income implies a relationship between the discount rate term structure and economic growth uncertainty. In the classic Ramsey framework, this relationship is governed by parameters reflecting pure time preference and the elasticity of the marginal utility of consumption; yet disagreement remains about the values of these parameters. We calibrate these parameters to match empirical evidence on both the future interest rate term structure and economic growth uncertainty, while also maintaining consistency with discount rates used for shorter-term benefit-cost analysis. Such an integrated approach is crucial amidst growth uncertainty, where growth is also a key determinant of climate damages. This results in an empirically driven, stochastic discounting rule to be used in estimating the SCC that also accounts for the correlation between climate damage estimates and discount rates.
Richard G. Newell
Dr. Richard G. Newell is the President and CEO of Resources for the Future. From 2009 to 2011, he served as the administrator of the US Energy Information Administration, the agency responsible for official US government energy statistics and analysis.
William A. Pizer
Billy Pizer is Vice President for Research and Policy Engagement at RFF. Previously, he was the Susan B. King Professor at the Sanford School of Public Policy, Duke University. He is also a Research Associate at the National Bureau of Economic Research.
Journal Article — Jun 27, 2022
Accounting for Ecosystem Service Values in Climate Policy
In a comment for Nature Climate Change, RFF Fellow Hannah Druckenmiller reflects on the need to incorporate the ecosystem impacts of climate change into the social cost of carbon.
Working Paper — Jun 23, 2022
The Social Cost of Carbon with Intragenerational Inequality under Economic Uncertainty
In this working paper, a formula is derived for calculating the social cost of carbon that takes into account the effects of intragenerational income inequality.