The social cost of carbon emissions: Seven propositions

Duncan Foley, Armon Rezai and Lance Taylor

Economics Letters, 2013, vol. 121, issue 1, 90-97

Abstract: Determining the social cost of carbon emissions (SCC) is a crucial step in the economic analysis of climate change policy as the US government’s recent decision to use a range of estimates of the SCC centered at $77/tC (or, equivalently, $21/tCO2) in cost-benefit analyses of proposed emission-control legislation underlines. This note reviews the welfare economics theory fundamental to the estimation of the SCC in both static and intertemporal contexts, examining the effects of assumptions about the typical agent’s pure rate of time preference and elasticity of marginal felicity of consumption, production and mitigation technology, and the magnitude of climate-change damage on estimates of the SCC. We highlight three key conclusions: (i) an estimate of the SCC is conditional on a specific policy scenario, the details of which must be made explicit for the estimate to be meaningful; (ii) the social discount rate relevant to intertemporal allocation decisions also depends on the policy scenario; and (iii) the SCC is uniquely defined only for policy scenarios that lead to an efficient growth path because marginal costs and benefits of emission–mitigation diverge on inefficient growth paths. We illustrate these analytical conclusions with simulations of a growth model calibrated to the world economy.

Keywords: Climate change; Cost-benefit analysis; Climate policy; Carbon price; Scenario-dependent discounting (search for similar items in EconPapers)
JEL-codes: C61 D61 D62 H23 Q52 Q54 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (31)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:121:y:2013:i:1:p:90-97

DOI: 10.1016/j.econlet.2013.07.006

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