Modeling Damage Scenarios: An Analysis of How Damage Function Specification Affects the Optimal Carbon Price.
Takasugi, Andrew R.
- My project is an analysis of the ways in which modifying damage function specification affects integrated assessment model output. My main concern is the effect on the carbon price, an estimate of the marginal social cost of carbon, which measures the sum of the market and externality costs associated with carbon usage. The level of the carbon price has important implications for policy makers foc... read moreused on minimizing the economic damages caused by climate change. Using a popular integrated assessment model, DICE 2016R, I model one scenario in which damages from climate change are applied to the growth of output, and a second in which they become catastrophic after a temperature based tipping point is crossed. After modeling each scenario I undertake a sensitivity analysis and model decomposition to consider how changes to key characteristics of the damage function affect carbon price estimates.I find that applying damages to growth consistently causes carbon price projections to increase dramatically. Across a range of empirically based parameterizations, growth effects damages result in carbon prices that are between four and ten times as high as those projected by the DICE 2016R model. While catastrophic damage scenarios lead to a wider range of outcomes, they too lead to carbon price estimates that can be as high as four times the DICE 2016R carbon price. These findings suggest that the standard DICE 2016R results may be dramatically underestimating damages from climate change, and that if recent empirical estimates are accurate, policy makers must curb emissions much more swiftly than previously thought.read less