Abstract
Integrated assessment models (IAMs) of climate and the economy provide estimates of the social cost of carbon and inform climate policy. With the Nested Inequalities Climate Economy model (NICE) (Dennig et al. PNAS 112:15,827–15,832, 2015), which is based on Nordhaus’s Regional Integrated Model of Climate and the Economy (RICE), but also includes inequalities within regions, we investigate the comparative importance of several factors—namely, time preference, inequality aversion, intraregional inequalities in the distribution of both damage and mitigation cost and the damage function. We do so by computing optimal carbon price trajectories that arise from the wide variety of combinations that are possible given the prevailing range of disagreement over each factor. This provides answers to a number of questions, including Thomas Schelling’s conjecture that properly accounting for inequalities could lead the inequality aversion parameter to have an effect opposite to what is suggested by the Ramsey equation.
Highlights
Models of optimal economic responses to climate change are contingent on highly uncertain estimates, including about the future societies with which climate will interact
As we describe in detail below, Nested Inequalities Climate Economy model (NICE) incorporates a fuller description of inequalities by income quintile in the distribution of income, damages and mitigation cost within each global region
NICE reveals the importance of a factor largely ignored by existing integrated assessment models (IAMs): the interaction between climate change and inequalities within regions and countries
Summary
Models of optimal economic responses to climate change are contingent on highly uncertain estimates, including about the future societies with which climate will interact. We find that even if such damages occur with certainty, the difference in optimal prices across the three specifications is smaller than for varying the sub-regional distribution of mitigation cost or damage over a credible range This is the case, as long as the inequality aversion parameter is greater than unity, on which most such studies agree (see Evans (2005) for estimates from OECD countries and Dasgupta (2008) for a theoretical overview). This paper relies on a model with inequalities within regions and countries in which the distribution of mitigation cost and damages can be varied, enabling us in particular to study the Schelling Reversal and the relative importance of catastrophes and distributional catastrophes as described above
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