The Impact of Climate Change on the Balanced Growth Equivalent: An Application of FUND
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The Stern Review added balanced growth equivalents (BGE) to the economic climate change research agenda. We first propose rigorous definitions of the BGE for multiple regions and under uncertainty. We show that the change in the BGE is independent of the assumed scenario of per capita income. For comparable welfare economic assumptions as the Stern Review, we calculate lower changes in BGE between a business as usual scenario and one without climate impacts with the model FUND than the Stern Review found with the model PAGE. We find that mitigation policies give even lower changes in BGE and argue that those policy choices should be the focus of the research effort rather than total damage estimates. According to our results, the current carbon tax should be below $55/tC. Sensitivity analyses show that the Stern Review chose parameters that imply high impact estimates. However, for regionally disaggregated welfare functions, we find changes in BGE that are significantly higher than the results from the Stern Review both for total damage as for policy analysis. With regional disaggregation and high risk aversion, we observe fat tails and with that very high welfare losses.
KeywordsImpacts of climate change Balanced growth equivalent Stern Review
JEL ClassificationD63 Q54
We had extensive discussions about the Stern Review with many people, notably Simon Dietz, Cameron Hepburn, Bill Nordhaus, Nick Stern, Gary Yohe, and Marty Weitzman. Three anonymous referees had excellent comments on a previous version of this paper. Funding by the International Max Planck Research School on Earth System Modeling and the ESRI Energy Policy Research Centre is gratefully acknowledged. All errors and opinions are ours.
This article is distributed under the terms of the Creative Commons Attribution Noncommercial License which permits any noncommercial use, distribution,and reproduction in any medium, provided the original author(s) and source are credited.
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