Calculating the Social Cost of Carbon

The paper discusses the determination of the social cost of carbon (SCC) using the PAGE2002 model used in the Stern Review. The SCC depends sensitively on assumptions about future economic development, the range and likelihood of economic and social damage arising from climate change at future dates and the discount rate to apply to that damage. The paper critically examines the choice of pure time preference and the weight to place on damage experienced by other countries in the distant future. Key conclusions are that the SCC rises at about 2.4% p.a. and the range of plausible estimates for the SCC is wide. The SCC is sensitive to a number of factors, significantly the equilibrium temperature rise for a doubling of CO2 concentration, the pure rate of time preference, the non-economic impact, the inequality weighting parameter and the half-life of global warming. Within the model the SCC appears surprisingly insensitive to the emissions scenario for reasons that are explained. The paper points out that methane and SF6 are also powerful GHGs whose impact can be estimated within the model.