Economics of climate change : sensitivity analysis of social cost of carbon

Abstract

Social cost of carbon (SCC) is the key concept in the economics of climate change. It measures the economic cost of climate impacts. SCC has influence on how beneficial it is to prevent climate change: if the value of SCC increases, investments to low-carbon technology become more attractive and profitable.

This paper examines the sensitivity of two important assumptions that affect to SCC: the choice of a discount rate and time horizon. Using the integrated assessment model, we calculate SCC estimates with multiple discount rates and various time horizon lengths.

Our results show that discount rate and time horizon have great effect on SCC. For example, the SCC estimates are drastically reduced under the use of a 10% discount rate versus 1% discount rate. Or, when dropping the end year of time horizon from 2300 to 2150, the SCC values decrease by average 12.8% per year. We conclude that if choosing different values of discount rate or time horizon, the outcome of the integrated assessment models can vary greatly.