Climate Impacts on Economic Growth as Drivers of Uncertainty in the Social Cost of Carbon

Abstract

One of the central ways that the costs of global warming are incorporated into U.S. law is in cost-benefit analysis of federal regulations. In 2010, to standardize analyses, an Interagency Working Group (IAWG) established a central estimate of the social cost of carbon (SCC) of $21/tCO2 drawn from three commonly-used models of climate change and the global economy. These models produced a relatively narrow distribution of SCC values, consistent with previous studies. We use one of the IAWG models, DICE, to explore which assumptions produce this apparent robustness. SCC values are constrained by a shared feature of model behavior: though climate damages become large as a fraction of economic output, they do not significantly alter economic trajectories. This persistent growth is inconsistent with the widely held belief that climate change may have strongly detrimental effects to human society. The discrepancy suggests that the models may not capture the full range of possible consequences of climate change. We examine one possibility untested by any previous study, that climate change may directly affect productivity, and find that even a modest impact of this type increases SCC estimates by many orders of magnitude. Our results imply that the SCC is far more uncertain than shown in previous modeling exercises and highly sensitive to assumptions. Understanding the societal impact of climate change requires understanding not only the magnitude of losses at any given time but also how those losses may affect future economic growth.

Keywords: climate change, social cost of carbon, integrated assessment modeling, valuation of environmental quality, U.S. climate policy

JEL Classification: Q54, Q51, Q58