Climate Impacts on Economic Growth as Drivers of Uncertainty in the Social Cost of Carbon

We reexamine estimates of the social cost of carbon (SCC) used by agencies as the price of carbon emissions in cost-benefit analysis, focusing on those by the federal Interagency Working Group on SCC (IWG). We show that the models used by the IWG assume continued economic growth in the face of substantial temperature increases, which suggests that they may not capture the full range of possible consequences of climate change. Using the DICE integrated assessment model, we examine the possibility that climate change may directly affect productivity and find that even a modest impact of this type increases SCC estimates substantially. The SCC appears to be highly uncertain and sensitive to modeling assumptions.

Understanding the impact of climate change therefore requires understanding how climate-related harms may affect productivity and economic growth. Furthermore, we suggest that misunderstandings about growth assumptions in the model may underlie the debate surrounding the proper discount rate.