The Social Cost of Carbon, Risk, Distribution, Market Failures: An Alternative Approach

77 Pages Posted: 15 Feb 2021 Last revised: 18 Nov 2021

See all articles by Nicholas Stern

Nicholas Stern

London School of Economics & Political Science (LSE) - Grantham Research Institute on Climate Change and the Environment

Joseph E. Stiglitz

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Date Written: February 2021

Abstract

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.

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Suggested Citation

Stern, Nicholas and Stiglitz, Joseph E., The Social Cost of Carbon, Risk, Distribution, Market Failures: An Alternative Approach (February 2021). NBER Working Paper No. w28472, Available at SSRN: https://ssrn.com/abstract=3785806 or http://dx.doi.org/10.2139/ssrn.3785806

Nicholas Stern (Contact Author)

London School of Economics & Political Science (LSE) - Grantham Research Institute on Climate Change and the Environment ( email )

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London, WC2A 2AE
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Joseph E. Stiglitz

Columbia Business School - Finance and Economics ( email )

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