The Social Cost of Carbon with Intragenerational Inequality under Economic Uncertainty

Frederick (Rick) van der Ploeg, Johannes Emmerling and Ben Groom

No 9777, CESifo Working Paper Series from CESifo

Abstract: A formula is derived for the social cost of carbon (SCC) that takes account of intragenerational income inequality and its evolution with economic growth. The social discount rate (SDR) should be adjusted to account for intragenerational and intergenerational inequality aversion and for risk aversion. If growth increases (reduces) intra-generational inequality, the SDR is lower (higher) and the SCC higher (lower) than along an inequality-neutral growth path, especially if intra-generational and intergenerational inequality aversion are higher. The same qualitative result is shown for two welfare specifications, one with a representative agent with equally distributed equivalent (EDE) income and the other considers individuals separately across the income distribution. The latter specification causes an additional impact of income inequality on the SDR and SCC because individuals are compared both within and between time periods. Our preferred EDE calibration to a scenario in which global intragenerational inequality declines over time, leads to a SCC in 2020 of $70/tCO2 compared to a value of $85/tCO2 without the effect of inequality.

Keywords: social discount rate; social cost of carbon; intra- and intergenerational inequality aversion; risk aversion; inequality; growth; uncertainty (search for similar items in EconPapers)
JEL-codes: C61 D31 D62 D81 G12 H23 Q54 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-ene, nep-env and nep-upt
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Citations: View citations in EconPapers (1)

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Working Paper: The Social Cost of Carbon with Intragenerational Inequality under Economic Uncertainty (2022)
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