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Damage Functions and the Social Cost of Carbon: Addressing Uncertainty in Estimating the Economic Consequences of Mitigating Climate Change

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Abstract

Mitigating the effects of human-induced climate change requires the reduction of greenhouse gases. Policymakers must balance the need for mitigation with the need to sustain and develop the economy. To make informed decisions regarding mitigation strategies, policymakers rely on estimates of the social cost of carbon (SCC), which represents the marginal damage from increased emissions; the SCC must be greater than the marginal abatement cost for mitigation to be economically desirable. To determine the SCC, damage functions translate projections of carbon and temperature into economic losses. We examine the impact that four damage functions commonly employed in the literature have on the SCC. Rather than using an economic growth model, we convert the CO2 pathways from the Representative Concentration Pathways (RCPs) into temperature projections using a three-layer, energy balance model and subsequently estimate damages under each RCP using the damage functions. We estimate marginal damages for 2020–2100, finding significant variability in SCC estimates between damage functions. Despite the uncertainty in choosing a specific damage function, comparing the SCC estimates to estimates of marginal abatement costs from the Shared Socioeconomic Pathways (SSPs) indicates that reducing emissions beyond RCP6.0 is economically beneficial under all scenarios. Reducing emissions beyond RCP4.5 is also likely to be economically desirable under certain damage functions and SSP scenarios. However, future work must resolve the uncertainty surrounding the form of damage function and the SSP estimates of marginal abatement costs to better estimate the economic impacts of climate change and the benefits of mitigating it.

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Notes

  1. DICE and FUND are both open-source models, while PAGE is not.

  2. RCP data are from https://tntcat.iiasa.ac.at/RcpDb/dsd?Action=htmlpage&page=welcome [accessed May 17, 2021].

  3. The authors thank F. vander Ploeg for drawing our attention to the various damage functions used in the literature.

  4. The RCP scenarios were used as inputs into climate models for the fifth Coupled Model Intercomparison Project (CMIP5), which then formed the basis of AR5.

  5. An example would be cloud formation. A warmer atmosphere holds more water vapor, some of which turns into clouds. Cloud formation can exacerbate the initial warming by reflecting and re-emitting outgoing radiation back to the Earth’s surface, but it can also create an albedo effect by reflecting incoming solar radiation back to space, suppressing the initial warming. The overall effect depends on the cloud’s density, altitude, and the time of day.

  6. Mass of the atmosphere equals 5.148 × 1018 kg. Assuming a CO2 concentration of 415 ppm, the mass of carbon in the atmosphere as a percent = 0.0415% × 44.0087 g ∙ CO2 ∙ mole–1 / 28.971 g ∙ mole–1 = 0.06304% CO2 by mass; multiply by the mass of the atmosphere to get the figure in the text.

  7. SSP data are from https://tntcat.iiasa.ac.at/SspDb/dsd?Action=htmlpage&page=10. We use the SSP marker scenarios.

  8. The climate-damage relationship is convex for most damage functions; for the Burke damage function, damages are linear but exhibiting concavity at higher temperatures.

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Acknowledgements

The authors acknowledge funding from Canada’s Social Sciences and Humanities Research Council (SSHRC grant #435-2020-0034). We are grateful for the feedback of two anonymous reviewers.

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Authors and Affiliations

  1. Vancouver School of Economics, University of British Columbia, Vancouver, BC, Canada

    Alyssa R. Russell

  2. Department of Economics, University of Victoria, Victoria, BC, Canada

    G. Cornelis van Kooten

  3. Department of Ocean Sciences, University of California, Santa Cruz, Santa Cruz, CA, USA

    Jonathan G. Izett

  4. Department of Economics and Business, Colorado College, Colorado Springs, CO, USA

    Mark E. Eiswerth

  5. Department of Economics, University of Northern Colorado, Greeley, CO, USA

    Mark E. Eiswerth

Authors
  1. Alyssa R. Russell
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  2. G. Cornelis van Kooten
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  3. Jonathan G. Izett
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  4. Mark E. Eiswerth
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Contributions

ARR: contributed to writing (original draft preparation), formal analysis, and data curation. GCvK: conceptualized research, supervision, funding acquisition, and contributed to formal analysis and writing (review and editing). JGI and MEE: contributed to data curation, formal analysis and writing (review and editing).

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Correspondence to G. Cornelis van Kooten.

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Russell, A.R., van Kooten, G.C., Izett, J.G. et al. Damage Functions and the Social Cost of Carbon: Addressing Uncertainty in Estimating the Economic Consequences of Mitigating Climate Change. Environmental Management 69, 919–936 (2022). https://doi.org/10.1007/s00267-022-01608-9

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  • DOI: https://doi.org/10.1007/s00267-022-01608-9

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