Skip to content
BY 4.0 license Open Access Published by De Gruyter Open Access April 30, 2012

The Influence of the Specification of Climate Change Damages on the Social Cost of Carbon

Robert E. Kopp EMAIL logo , Alexander Golub , Nathaniel O. Keohane and Chikara Onda
From the journal Economics


Drawing upon climate change damage specifications previously proposed in the literature that the authors have calibrated to a common level of damages at 2.5°C, the authors examine the effect upon the social cost of carbon (SCC) of varying damage specifications in a DICE-like integrated assessment model. They find that SCC estimates are highly sensitive to uncertainty in extrapolating damages to high temperatures at moderate-to-high levels of risk aversion, but only modestly so at low levels of risk aversion. While in the absence of risk aversion, all of the SCC estimates but one agree within a factor of two, with a moderate level of risk aversion included, the differences among estimates grow greatly. For example, one composite damage specification, combining elements of different literature-derived specifications and roughly taking into account calibration uncertainty, yields SCC values 32% higher than the standard quadratic DICE damage function in the absence of risk aversion. With a coefficient of relative risk aversion of 1.4, however, the same uncertain specification yields SCC values almost triple those of the standard function. The authors conclude that failure to consider damages uncertainty and risk aversion jointly can lead to significant underestimation of the SCC.

JEL Classification: Q54; Q58


Ackerman, F., Stanton, E., and Bueno, R. (2010). Fat tails, exponents, extreme uncertainty: Simulating catastrophe in DICE. Ecological Economics, 69: 1657–1665. doi 10.1016/j.ecolecon.2010.03.013. url in Google Scholar

Anthoff, D., Hepburn, C., and Tol, R. (2009). Equity weighting and the marginal damage costs of climate change. Ecological Economics, 68: 836–849. doi 10.1016/j.ecolecon.2008.06.017. url in Google Scholar

Anthoff, D., and Tol, R. S. (2010). The climate framework for uncertainty, negotiation and distribution (FUND), technical description, version 3.5. url in Google Scholar

Atkinson, G., Dietz, S., Helgeson, J., Hepburn, C., and Sælen, H. (2009). Siblings, not triplets: Social preferences for risk, inequality and time in discounting climate change. Economics: The Open-Access, Open-Assessment E-Journal, pages 2009–26. doi 10.5018/economics-ejournal.ja.2009-26. url in Google Scholar

Azar, C., and Lindgren, K. (2003). Catastrophic events and stochastic costbenefit analysis of climate change. Climatic Change, 56: 245–255. doi 10.1023/A:1021743622080.Search in Google Scholar

Baumol, W. (1972). On taxation and the control of externalities. American Economic Review, 62: 307–322. url in Google Scholar

Darwin, R., Tsigas, M., Lewandrowski, J., and Raneses, A. (1995). World agriculture and climate change. Agricultural Economic Report 703, U.S. Department of Agriculture. url in Google Scholar

Downing, T., Eyre, N., Greener, R., and Blackwell, D. (1996). Full fuel cycle study: Evaluation of the global warming externality for fossil fuel cycles with and without CO2 abatament and for two reference scenarios. Report to the International Energy Agency Greenhouse Gas R&D Programme, Environmental Change Unit, University of Oxford, Oxford. url in Google Scholar

Downing, T., Greener, R., and Eyre, N. (1995). The economic impacts of climate change: Assessment of fossil fuel cycles for the externE Project. Environmental Change Unit, University of Oxford, and Eyre Energy Environment, Lonsdale.Search in Google Scholar

Fankhauser, S. (1995). Protection versus retreat: the economic costs of sea-level rise. Environment and Planning A, 27: 299–319. doi 10.1016/j.eneco.2006.11.006.Search in Google Scholar

Fankhauser, S., and Tol, R. (2005). On climate change and economic growth. Resource and Energy Economics, 27: 1 – 17. doi 10.1016/j.reseneeco.2004.03.003. url in Google Scholar

Forster, P., Ramaswamy, V., Artaxo, P., Berntsen, T., Betts, R., Fahey, D., Haywood, J., Lean, J., Lowe, D., Myhre, G., Nganga, J., Prinn, R., Raga, G., Schulz, M., and Van Dorland, R. (2007). Changes in atmospheric constituents and in radiative forcing. In S. Solomon, D. Qin, M. Manning, Z. Chen, M. Marquis, K. B. Averyt, M. Tignor, and H. L. Miller (Eds.), Climate Change 2007: The Physical Science Basis, pages 130–234. Cambridge, UK: Cambridge University Press. url in Google Scholar

Hope, C. (2006). The marginal impact of CO2 from PAGE2002: An integrated assessment model incorporating the IPCC’s five reasons for concern. Integrated Assessment, 6: 19–56. url in Google Scholar

Hope, C. (2008). Discount rates, equity weights and the social cost of carbon. Energy Economics, 30: 1011–1019. doi 10.1016/j.eneco.2006.11.006. url in Google Scholar

Interagency Working Group on the Social Cost of Carbon, U. S. G. (2010). Appendix 15a. Social cost of carbon for regulatory impact analysis under Executive Order 12866. In Final rule technical support document (TSD): Energy efficiency program for commercial and industrial equipment: small electric motors. U.S. Department of Energy. url in Google Scholar

Kattenberg, A., Giorgi, F., Grassl, H., Meehl, G. A., Mitchell, J., Stouffer, R., Tokioka, T., Weaver, A., and Wigley, T. (1995). Climate models-projections of future climate. In J. T. Houghton, M. L. G. Filho, N. Callander, N. Harris, A. Kattenberg, and K. Maskell (Eds.), Climate Change 1995: The Science of Climate Change, pages 285–357. Cambridge, UK: Cambridge University Press.Search in Google Scholar

Keller, K., Bolker, B., and Bradford, D. (2004). Uncertain climate thresholds and optimal economic growth. Journal of Environmental Economics and Management, 48: 723–741. doi 10.1016/j.jeem.2003.10.003. url in Google Scholar

Kopp, R., and Mignone, B. (2012). The U.S. government’s social cost of carbon estimates after their first two years: Pathways for improvement. Economics: The Open-Access, Open-Assessment E-Journal, in press.Search in Google Scholar

Kousky, C., Kopp, R., and Cooke, R. (2011). Risk premia and the social cost of carbon: a review. Economics: The Open-Access, Open-Assessment E-Journal, 5: 2011–21. doi 10.5018/economics-ejournal.ja.2011-21. url in Google Scholar

Lempert, R., Schlesinger, M., Bankes, S., and Andronova, N. (2000). The impacts of climate variability on near-term policy choices and the value of information. Climatic Change, 45: 129–161. doi 10.1023/A:1005697118423.Search in Google Scholar

Lobell, D., Schlenker, W., and Costa-Roberts, J. (2011). Climate trends and global crop production since 1980. Science, 333: 616–620. doi 10.1126/science.1204531.Search in Google Scholar

Loewenstein, G., and Prelec, D. (1991). Negative time preference. The American Economic Review, 81: 347–352. url in Google Scholar

Manne, A., Mendelsohn, R., and Richels, R. (1995). MERGE: A model for evaluating regional and global effects of GHG reduction policies. Energy Policy, 23: 17–34. url in Google Scholar

Mastrandrea, M., and Schneider, S. (2001). Integrated assessment of abrupt climatic changes. Climate Policy, 1: 433–449. doi 10.3763/cpol.2001.0146.Search in Google Scholar

Murray, C., Lopez, A., and Bank, W. (1996). The global burden of disease: A comprehensive assessment of mortality and disability from diseases, injuries, and risk factors in 1990 and projected to 2020. Harvard School of Public Health.Search in Google Scholar

New, M., Liverman, D., Schroder, H., and Anderson, K. (2011). Four degrees and beyond: The potential for a global temperature increase of four degrees and its implications. Philosophical Transactions of the Royal Society A: Mathematical, Physical and Engineering Sciences, 369: 6–19. doi 10.1098/rsta.2010.0303.Search in Google Scholar

Newbold, S., Griffiths, C., Moore, C., Wolverton, A., and Kopits, E. (2010). The “social cost of carbon” made simple. Working Paper 2010-07, U.S. Environmental Protection Agency National Center for Environmental Economics. url in Google Scholar

Nordhaus, W. (1992). An optimal transition path for controlling greenhouse gases. Science, 258: 1315–1319. doi 10.1126/science.258.5086.1315. url in Google Scholar

Nordhaus, W. (1994). Expert opinion on climatic change. American Scientist, 82: 45–51.Search in Google Scholar

Nordhaus, W. (2007). Accompanying notes and documentation on development of DICE-2007 model. url in Google Scholar

Nordhaus, W., and Boyer, J. (2000). Warming the world: Economic models of global warming. Cambridge, MA: The MIT Press.Search in Google Scholar

Peck, S., and Teisberg, T. (1992). CETA: a model for carbon emissions trajectory assessment. The Energy Journal, 13: 55–78. url in Google Scholar

Perez-Garcia, J., Joyce, L., Binkley, C., and McGuire, A. (1997). Economic impacts of climatic change on the global forest sector: An integrated ecological/economic assessment. Critical reviews in environmental science and technology, 27: 123–138. doi 10.1080/10643389709388514.Search in Google Scholar

Roe, G., and Baker, M. (2007). Why is climate sensitivity so unpredictable? Science, 318: 629–632. doi 10.1126/science.1144735.Search in Google Scholar

Schneider, S., Semenov, S., Patwardhan, A., Burton, I., Magadza, C., Oppenheimer, M., Pittock, A., Rahman, A., Smith, J., and Suarez, A. (2007). Assessing key vulnerabilities and the risk from climate change. In M. L. Parry, O. F. Canziani, J. P. Palutilkof, P. J. van der Linden, and C. E. Hanson (Eds.), Climate change 2007: Impacts, adaptation and vulnerability, pages 779–810. Cambridge, United Kingdom: Cambridge University Press. url in Google Scholar

Sohngen, B., Mendelsohn, R., and Sedjo, R. (2001). A global model of climate change impacts on timber markets. Journal of Agricultural and Resource Economics, 26. url in Google Scholar

Sterner, T., and Persson, U. (2008). An even Sterner review: Introducing relative prices into the discounting debate. Review of Environmental Economics and Policy, 2: 61–76. doi 10.1093/reep/rem024. url in Google Scholar

Tol, R. (2002). Estimates of the damage costs of climate change. Part 1: Benchmark estimates. Environmental and Resource Economics, 21: 47–73. doi 10.1023/A:1014500930521. url in Google Scholar

Tol, R. (2011). The social cost of carbon. Annual Review of Resource Economics, 3: 419–443. doi 10.1146/annurev-resource-083110-120028.Search in Google Scholar

Toya, H., and Skidmore, M. (2007). Economic development and the impacts of natural disasters. Economics Letters, 94: 20–25. doi 10.1016/j.econlet.2006.06.020,. url in Google Scholar

Traeger, C. (2009). Recent developments in the intertemporal modeling of uncertainty. Annual Review of Resource Economics, 1: 261–286. doi 10.1146/annurev.resource.050708.144242. url in Google Scholar

Warren, R., Hope, C., Mastrandrea, M., Tol, R., Adger, N., and Lorenzoni, I. (2006). Spotlighting the impacts functions in integrated assessments. Research report prepared for the Stern Review on the Economics of Climate Change. Working Paper 91, Tyndall Centre. url in Google Scholar

Weitzman, M. L. (2009a). Additive damages, fat-tailed climate dynamics, and uncertain discounting. Economics: The Open-Access, Open-Assessment EJournal, 3: 2009–39. doi 10.5018/economics-ejournal.ja.2009-39. url in Google Scholar

Weitzman, M. L. (2009b). On modeling and interpreting the economics of catastrophic climate change. The Review of Economics and Statistics, 91: 1–19. doi 10.1146/annurev.resource.050708.144242. url in Google Scholar

Yohe, G., and Schlesinger, M. (1998). Sea-level change: the expected economic cost of protection or abandonment in the United States. Climatic Change, 38: 447–472. doi 10.1023/A:1005338413531.Search in Google Scholar

Published Online: 2012-04-30
Published in Print: 2012-12-01

© 2012 Robert E. Kopp et al., published by Sciendo

This work is licensed under the Creative Commons Attribution 4.0 International License.

Downloaded on 27.1.2023 from
Scroll Up Arrow