Relative Prices and Climate Policy: How the Scarcity of Nonmarket Goods Drives Policy Evaluation
- (pp. 168-201)
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.Citation
Drupp, Moritz, A., and Martin C. Hänsel. 2021. "Relative Prices and Climate Policy: How the Scarcity of Nonmarket Goods Drives Policy Evaluation." American Economic Journal: Economic Policy, 13 (1): 168-201. DOI: 10.1257/pol.20180760Additional Materials
JEL Classification
- D61 Allocative Efficiency; Cost-Benefit Analysis
- H43 Project Evaluation; Social Discount Rate
- Q51 Valuation of Environmental Effects
- Q54 Climate; Natural Disasters and Their Management; Global Warming
- Q58 Environmental Economics: Government Policy
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