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Relative Prices and Climate Policy: How the Scarcity of Nonmarket Goods Drives Policy Evaluation

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  • Moritz A. Drupp
  • Martin C. Hänsel
Abstract
Climate change not only impacts production and market consumption but also the relative scarcity of nonmarket goods, such as environmental amenities. We study fundamental drivers of the resulting relative price changes, their potential magnitude, and their implications for climate policy in Nordhaus's Dynamic Integrated Climate-Economy (DICE) model, thereby addressing one of its key criticisms. We propose plausible ranges for these relative prices changes based on best available evidence. Our central calibration reveals that accounting for relative prices is equivalent to decreasing pure time preference by 0.6 percentage points and leads to a more than 50 percent higher social cost of carbon.

Suggested Citation

  • Moritz A. Drupp & Martin C. Hänsel, 2021. "Relative Prices and Climate Policy: How the Scarcity of Nonmarket Goods Drives Policy Evaluation," American Economic Journal: Economic Policy, American Economic Association, vol. 13(1), pages 168-201, February.
    • Handle: RePEc:aea:aejpol:v:13:y:2021:i:1:p:168-201
    DOI: 10.1257/pol.20180760
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    More about this item

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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