The Influence of the Specification of Climate Change Damages on the Social Cost of Carbon

Abstract

Drawing upon climate change damage specifications previously proposed in the literature that the authors have calibrated to a common level of damages at 2.5°C, the authors examine the effect upon the social cost of carbon (SCC) of varying damage specifications in a DICE-like integrated assessment model. They find that SCC estimates are highly sensitive to uncertainty in extrapolating damages to high temperatures at moderate-to-high levels of risk aversion, but only modestly so at low levels of risk aversion. While in the absence of risk aversion, all of the SCC estimates but one agree within a factor of two, with a moderate level of risk aversion included, the differences among estimates grow greatly. For example, one composite damage specification, combining elements of different literature-derived specifications and roughly taking into account calibration uncertainty, yields SCC values 32% higher than the standard quadratic DICE damage function in the absence of risk aversion. With a coefficient of relative risk aversion of 1.4, however, the same uncertain specification yields SCC values almost triple those of the standard function. The authors conclude that failure to consider damages uncertainty and risk aversion jointly can lead to significant underestimation of the SCC.Special Issue The Social Cost of Carbon JEL Q54, Q58

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