Increase in carbon prices: analysis of energy-economy modeling

Abstract

This study examines the mechanisms of social cost of carbon (SCC) and marginal abatement cost (MAC) in climate change modeling. To examine these mechanisms, we observed the shifts in the marginal benefit (MB) and marginal cost (MC) curves of carbon dioxide (CO2) abatement when parameter values are changed. In the observation, we used the DICE model proposed by Nordhaus (A question of balance: weighing the options on global warming policies. Yale University Press, New Haven, 2008) changing 24 parameters for the observation. In consequent, firstly, we have found that discount rate is not only one of the parameters which significantly raise the carbon price, that is, other parameters may have significant impact too. Secondly, we have found that there are two patterns in the rise of the SCC, and three patterns in the rise of the MAC. Thirdly, we have found that the difference between the rise of the SCC and MAC is primarily caused by the horizontal MB curve in CO2 emissions reduction; an upward shift of MC curve raises MAC but never raises the SCC. Thus, the choice of the SCC or MAC may make the change of carbon price different, affecting global warming policy.