The Social Cost of Carbon under Climate Volatility Risk

Xu Lin and Sweder van Wijnbergen

No 18210, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We calculate the social cost of carbon (SCC) under stochastic climate volatility resulting from uncertainty about future climate risk regimes where weather extremes are becoming more frequent and intense. Using a stochastic dynamic integrated climate-economy model where representative agents are endowed with Duffie-Epstein recursive preferences, we find that climate volatility risks substantially increase the SCC both in the business-as-usual and optimal abatement policy scenario. We also show that switching to a regime with more intense disasters increases the SCC more than a switch to a regime with more frequent disasters for equal expected value. Overall we show that \textit{stochastic volatility} has a major impact on the SCC.

Keywords: stochastic; volatility (search for similar items in EconPapers)
JEL-codes: G12 G13 Q51 Q54 (search for similar items in EconPapers)
Date: 2023-06
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