The “Social Cost of Carbon” Made Simple

Stephen Newbold, Charles Griffiths, Chris Moore, Ann Wolverton and Kopits. Elizabeth

No 280887, National Center for Environmental Economics-NCEE Working Papers from United States Environmental Protection Agency (EPA)

Abstract: The “social cost of carbon” (SCC) is the present value of the future damages from one additional unit of carbon emissions in a particular year. This paper develops a simple model for calculating the social cost of carbon. The model includes the essential ingredients for calculating the SCC at the global scale, and is designed to be transparent and easy to use by decision-makers and non-specialists. We use the model to compare estimates of the SCC under certainty and uncertainty in a Monte Carlo analysis. We find that, due to the combined effects of uncertainty and risk aversion, the certainty-equivalent SCC can be substantially larger than the expected value of the SCC. In our Monte Carlo simulation, the certainty-equivalent SCC corresponds to the 97th percentile of the simulated probability distribution of the deterministic SCC. We also compare the approximate present value of benefits estimated using the SCC to the exact value of compensating variation in the initial period for a wide range of hypothetical emission reduction policies.

Keywords: Demand and Price Analysis; Environmental Economics and Policy (search for similar items in EconPapers)
Pages: 44
Date: 2010-08
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Persistent link: https://EconPapers.repec.org/RePEc:ags:nceewp:280887

DOI: 10.22004/ag.econ.280887

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