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.
A formula is derived for the social cost of carbon (SCC) that takes account of intragenerational income inequality and its evolution with economic growth. The social discount rate (SDR) should be adjusted to account for intragenerational and intergenerational inequality aversion and for risk aversion. If growth increases (reduces) intra-generational inequality, the SDR is lower (higher) and the SCC higher (lower) than along an inequality-neutral growth path, especially if intra-generational and intergenerational inequality aversion are higher. The same qualitative result is shown for two welfare speciﬁcations, one with a representative agent with equally distributed equivalent (EDE) income and the other considers individuals separately across the income distribution. The latter speciﬁcation causes an additional impact of income inequality on the SDR and SCC because individuals are compared both within and between time periods. Our preferred EDE calibration to a scenario in which global intragenerational inequality declines over time, leads to a SCC in 2020 of $70/tCO2 compared to a value of $85/tCO2 without the eﬀect of inequality.
Frederick van der Ploeg
Media Highlight — May 26, 2022
E&E News: "How Pausing the Social Cost of Carbon Affected Regulation"
Fellow Brian Prest comments on the relationship between the social cost of carbon and federal oil and gas leasing.
Resources Magazine — May 19, 2022
Senior Fellow Status Update
Robert Stavins talks with economist Maureen L. Cropper about her career in environmental economics, the social cost of carbon, the future of climate policy, climate activism, and more.