Inequality, climate impacts on the future poor, and carbon prices

Abstract

Integrated assessment models of climate and the economy provide estimates of the social cost of carbon and inform climate policy. We create a variant of the Regional Integrated model of Climate and the Economy (RICE)-a regionally disaggregated version of the Dynamic Integrated model of Climate and the Economy (DICE)-in which we introduce a more fine-grained representation of economic inequalities within the model's regions. This allows us to model the common observation that climate change impacts are not evenly distributed within regions and that poorer people are more vulnerable than the rest of the population. Our results suggest that this is important to the social cost of carbon-as significant, potentially, for the optimal carbon price as the debate between Stern and Nordhaus on discounting.T he most prominent debate on cost-benefit evaluation of climate policy has been on the discount rate (see, e.g. refs. 1-4).* One of the important principles this debate has highlighted is that the effect of climate impacts are discounted when they are borne by more affluent-future-generations. † However, despite Schelling's early remarks (9) that this principle should also apply across contemporaries with different levels of affluence, the interaction between climate impacts and economic inequality has only been studied by looking at inequality between regions (10, 11). This is potentially an important oversight, because in leading cost-benefit integrated assessment models (IAMs) much of the poverty associated with high levels of vulnerability is masked by regional averaging of economic variables. ‡ In light of this, we modify a leading climate-economy model, Regional Integrated model of Climate and the Economy (RICE), to include what is known about economic inequality within regions and countries. This representation of economic inequality allows us to investigate the effect on optimal policy of different assumptions about the distribution of damages by economic strata. § When subregional differences are modeled in this way, several policy-relevant aspects of the model can change dramatically even when other assumptions and parameters from RICE are held constant. As we show below, even when RICE regional damage functions are used to establish the damage level of each region, the distribution of damage within regions can cause some members of future generations to be less affluent than their current counterparts. { If the distribution of damage is less skewed to high incomes than the distribution of consumption, then weak or no climate policy will result in sufficiently large damages on the lower economic strata to eventually stop their welfare levels from improving, and instead cause them to decline. This paints a different picture from the standard narrative in leading cost-benefit IAMs, where regional average consumptions continue to grow even under business-as-usual (BAU).The implications for policy recommendations are striking, both by the standard utilitarian metric and by metrics of sustainability (18) and just...

The comparative importance for optimal climate policy of discounting, inequalities and catastrophes

“…In other work (Dennig et al 2015), we show that the value of ξ is of great importance to climate policy. For example, when damages are distributed inversely proportionally to income, optimal mitigation effort under the discounting and inequality aversion assumptions of Nordhaus (2007) is equivalent to optimal mitigation in the more aggregated RICE model under the much lower discounting and inequality aversion assumptions of the Stern Review (Stern 2006).…”

“…More generally, the growth rate assumed in leading IAMs generates substantial inequalities between generations, as the assumed growth rates and damage functions imply that future generations will grow richer and richer even under business as usual (Dennig et al 2015;Anthoff et al 2009). As a result, the optimal amount of mitigation effort depends very much on two parameters in the social objective of these models: first, the rate at which future generations are discounted simply because they are in the future, which is represented by the rate of pure time preference ρ and, second, the relative priority of the poor and the rich, which is represented by the inequality aversion parameter η (i.e.…”

“…Other researchers provide a similar sense of urgency based on other features, such as the possibility of catastrophic damages (Weitzman 2009(Weitzman , 2012Dietz and Stern 2015), the possibility that climate damages will disproportionately harm the poor within countries (Dennig et al 2015), price effects (Sterner and Persson 2008) and damages affecting growth rates (Moore and Diaz 2015;Dietz and Stern 2015). Ackerman and Stanton (2012) combine variations about the discount rate, climate sensitivity and damages and obtain a wide range of carbon prices with the DICE model.…”

“…Second, the distribution of mitigation costs and damages is of prime importance for optimal mitigation, whereas catastrophes become relevant only when inequalities are a low concern. Our investigation of these issues is made possible by further development of the Nested Inequalities Climate Economy (NICE) model (Dennig et al 2015), which is based on Nordhaus's Regional Integrated Model of Climate and the Economy (RICE 2010) (Nordhaus 2010), but also includes mechanisms to represent inequalities within regions and countries that are not included in RICE or in other existing climate-economy IAMs.…”

Climate change and the re-evaluation of cost-benefit analysis

“…17 Predictably, this caused a re-evaluation of the valuation of lives. More generally, distributional considerations have made a comeback in cost-benefit models of climate change, as evidenced by Azar and Sterner (1996), Fankhauser et al (1997), Azar (1999), Tol (2001), Tol et al (2004), Tol (2005), Hope (2008), Anthoff et al (2009), Anthoff and Tol (2010), and Dennig et al (2015). More importantly, their previous omission was not a trivial matter.…”