A RAPID ASSESSMENT MODEL FOR UNDERSTANDING THE SOCIAL COST OF CARBON

The "social cost of carbon" (SCC) is the present value of the stream of future damages from one additional unit of carbon emissions in a particular year. This paper develops a rapid assessment model for the SCC. The model includes the essential ingredients for calculating the SCC at the global scale and is designed to be transparent and easy to use and modify. Our goal is to provide a tool to help analysts and decision-makers quickly explore the implications of various modeling assumptions for the SCC. We use the model to conduct sensitivity analyses over some of the key input parameters, and we 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 is more than four times larger than the expected value of the SCC, and we show that this result depends crucially on how the uncertain preference parameters are handled. 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.