The Social Cost of Carbon, Risk, Distribution, Market Failures: An Alternative Approach
Designing policy for climate change requires analyses which integrate the interrelationship between the economy and environment, including: the immense risks and impacts on distribution across and within generations; the many failures, limitations or absences of key markets; and the limitations on government, both in offsetting these failures and distributional impacts. Much of the standard economic modelling, including Integrated Assessment Models, does not embody key aspects of these essentials. We identify fundamental flaws in both the descriptive and normative methodologies commonly used to assess climate policy, showing systematic biases, with costs of climate action overestimated and benefits underestimated. We provide an alternative methodology by which the social cost of carbon may be calculated, one which embraces the essential elements we have identified.
Nicholas Stern acknowledges support from the Grantham Research Institute on Climate Change and the Environment, at the London School of Economics, and the ESRC Centre for Climate Change Economics and Policy (CCCEP) (ref. ES/R009708/1). Joseph Stiglitz acknowledges support from the Institute for New Economic Thinking (INET). The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.