CALCULATING THE SOCIAL COSTS OF CARBON WITHOUT KNOWING PREFERENCES COMMENT ON "A RAPID ASSESSMENT MODEL FOR UNDERSTANDING THE SOCIAL COST OF CARBON"

• Published in: Climate change economics Vol. 5; no. 2; p. 1450004
• Main Author: GERLAGH, REYER
• Format: Journal Article
• Language: English
• Published: Singapore World Scientific Publishing Company 01-05-2014; World Scientific Publishing Co. Pte., Ltd
• Subjects: Assessments; Carbon; Carbon dioxide; Economic models; Parameter uncertainty; Scaling; Social costs; Stochasticity; Climate change; integrated assessment models; uncertainty; social cost of carbon
• ISSN: 2010-0078; 2010-0086
• DOI: 10.1142/S2010007814500043

The Social Costs of Carbon (SCC) equals the marginal welfare loss associated with one unit of emitted CO2, divided by the marginal welfare gain associated with one unit of consumption. In stochastic assessments, both the nominator and denominator can depend on uncertain parameters; specifically they depend on the (implicit) scaling of the welfare function with the parameters. I discuss some pitfalls when calculating the expected value or the certainty equivalent of the SCC, and show that a mistaken procedure easily leads to very high or very low estimates for the SCC. I use the paper by Newbold et al. (2013) as an illustration.