Working Paper: CEPR ID: DP18210
Authors: Xu Lin; Sweder van Wijnbergen
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; Social Cost of Carbon; Climate Damage; Duffie-Epstein Preference
JEL Codes: G12; G13; Q51; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| climate volatility (Q54) | SCC (L96) |
| climate volatility (Q54) | discount rate (E43) |
| climate volatility (Q54) | expected value of future consumption flows (D15) |
| climate volatility risk premium (Q54) | SCC (L96) |
| climate volatility (Q54) | SCC under stringent emission control policies (Q52) |