On the social cost of carbon and discounting in the DICE model

Philipp Braun; Timm Faulwasser; Lars Grüne; Christopher M. Kellett; Willi Semmler; Steven R. Weller; Philipp Braun; Timm Faulwasser; Lars Grüne; Christopher M. Kellett; Willi Semmler; Steven R. Weller

doi:10.3934/environsci.2024024

AIMS Environmental Science

2024, Volume 11, Issue 3: 471-495. doi: 10.3934/environsci.2024024

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On the social cost of carbon and discounting in the DICE model

1.
School of Engineering, The Australian National University, Canberra, Australia
2.
Institute of Energy Systems, Energy Efficiency and Energy Economics, Technische Universität Dortmund, Dortmund, Germany and Institute of Control Systems, Hamburg University of Technology, Hamburg, Germany
3.
Mathematisches Institut, Universität Bayreuth, Bayreuth, Germany
4.
New School for Social Research, New York, USA, and University of Bielefeld, Bielefeld, Germany, and International Institute for Applied Systems Analysis, Austria
5.
School of Engineering, University of Newcastle, Newcastle, Australia

Received: 20 March 2024 Revised: 20 May 2024 Accepted: 31 May 2024 Published: 25 June 2024

The social cost of carbon (SCC) has emerged as one of the relevant measures in integrated assessment models in climate economics, to quantify costs related to global warming and climate change. While the SCC is used in different models, including DICE (Dynamic Integrated model of Climate and Economy), PAGE (Policy Analysis of the Greenhouse Effect), and FUND (Climate Framework for Uncertainty, Negotiation, and Distribution), its exact definition and computation depend on the reference and, frequently lacking consistency within research streams whether focusing on a single model or on different models. In this study, we investigated three different methods for the computation of the SCC using the integrated assessment model DICE. While the first two methods are commonly known and used, the novel formula derived for the third method allows a direct analysis of the impact of the discount factor in the calculation of the SCC. We provide a detailed proof for the correctness of the third method and validate the consistency of all three methods by numerical experiments.
- economics of climate change,
- DICE,
- optimal control,
- social cost of carbon,
- sensitivity analysis
Citation: Philipp Braun, Timm Faulwasser, Lars Grüne, Christopher M. Kellett, Willi Semmler, Steven R. Weller. On the social cost of carbon and discounting in the DICE model[J]. AIMS Environmental Science, 2024, 11(3): 471-495. doi: 10.3934/environsci.2024024

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Abstract

The social cost of carbon (SCC) has emerged as one of the relevant measures in integrated assessment models in climate economics, to quantify costs related to global warming and climate change. While the SCC is used in different models, including DICE (Dynamic Integrated model of Climate and Economy), PAGE (Policy Analysis of the Greenhouse Effect), and FUND (Climate Framework for Uncertainty, Negotiation, and Distribution), its exact definition and computation depend on the reference and, frequently lacking consistency within research streams whether focusing on a single model or on different models. In this study, we investigated three different methods for the computation of the SCC using the integrated assessment model DICE. While the first two methods are commonly known and used, the novel formula derived for the third method allows a direct analysis of the impact of the discount factor in the calculation of the SCC. We provide a detailed proof for the correctness of the third method and validate the consistency of all three methods by numerical experiments.

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