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The Social Cost of Carbon with Intragenerational Inequality and Economic Uncertainty

Author

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  • Frederick van der Ploeg

    (Department of Economics, University of Oxford)

  • Johannes Emmerling

    (RFF-CMCC European Institute on Economics and the Environment, Centro Euro-Mediterraneo sui Cambiamenti Climatici)

  • Ben Groom

    (Department of Economics, University of Exeter)

Abstract

An analytical formula is presented for the Social Cost of Carbon (SCC) taking account of intragenerational income inequality, in addition to intergenerational income inequality, macro-economic uncertainty and rare disasters to economic growth. The social discount rate is adjusted for intra- and intergenerational inequality aversion and risk aversion. If growth reduces intragenerational inequality, the SCC is lower than with inequality-neutral growth, especially if intra- and intergenerational inequality aversion are high. Calibrated to the observed interest rate and risk premium, the SCC in 2020 is $125/tCO2 without considering intragenerational inequality, $81/tCO2 if intragenerational inequality decreases over time, as a continuation of historical trends suggests (based on Shared Socioeconomic Pathway (SSP) 2), and $213/tCO2 if inequality increases (SSP4). Intragenerational inequality has a similar order of effect on the SSC as accounting for rare macroeconomic disasters.

Suggested Citation

  • Frederick van der Ploeg & Johannes Emmerling & Ben Groom, 2023. "The Social Cost of Carbon with Intragenerational Inequality and Economic Uncertainty," Discussion Papers 2301, University of Exeter, Department of Economics.
    • Handle: RePEc:exe:wpaper:2301
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    References listed on IDEAS

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    More about this item

    Keywords

    social discount rate; social cost of carbon; intra- and intergenerational inequality aversion; risk aversion; inequality; growth; uncertainty;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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