The Social Cost of Carbon with Economic and Climate Risks

Abstract

Uncertainty about future economic and climate conditions substantially affects the choice of policies for managing interactions between the climate and the economy. We develop a framework of dynamic stochastic integration of climate and economy, and show that the social cost of carbon is substantially affected by both economic and climate risks and is a stochastic process with significant variation. We examine a wide but plausible range of values for critical parameters with robust results and show that large-scale computing makes it possible to analyze policies in models substantially more complex and realistic than usually used in the literature.