The Social Cost of Carbon under Climate Volatility Risk

Xu Lin and Sweder van Wijnbergen
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Xu Lin: University of Amsterdam

No 23-032/IV, Tinbergen Institute Discussion Papers from Tinbergen Institute

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 stochastic volatility has a major impact on the SCC.Classification-JEL: G12, G13, Q51, Q54

Keywords: stochastic volatility; social cost of carbon; climate damage; Duffie-Epstein preference (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene, nep-env, nep-mfd and nep-res
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https://papers.tinbergen.nl/23032.pdf (application/pdf)

Related works:
Working Paper: The Social Cost of Carbon under Climate Volatility Risk (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20230032

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