Modeling Damages in Climate Policy Models: Temperature-Based or Carbon-Based?

28 Pages Posted: 14 Apr 2015

See all articles by Charles F. Mason

Charles F. Mason

University of Wyoming - College of Business - Department of Economics and Finance

Neil A. Wilmot

University of Minnesota - Duluth - Department of Economics

Date Written: March 31, 2015

Abstract

Economists have analyzed potential for damages from climate change from theoretical analyses and with Integrated Assessment Models (IAMs). Analytical models typically write damages as a function of the carbon stock, while IAMs typically view damages as based on temperatures. In this paper, we evaluate the implications for adapting analytic models to include two state variables — temperature and carbon stocks. We first provide an analytical comparison of a model where damages are based on carbon stocks against a model where damages are based on temperatures. When damages are based on carbon stocks, the time path of optimal emissions is described by a first-order differential equation; when damages are based on temperatures, the time path of optimal emissions is described by a second-order differential equation. We then proceed to an empirical analysis of the link between temperatures and carbon stocks. Our empirical analysis strongly supports a relation between levels of carbon stocks and changes in temperatures, and indicates the virtual absence of a linkage between levels of carbon and levels of temperature. As such, it is broadly supportive of a more elaborate modeling structure, under which two state variables are included in the analytical framework.

Keywords: climate change, damage function

Suggested Citation

Mason, Charles F. and Wilmot, Neil A., Modeling Damages in Climate Policy Models: Temperature-Based or Carbon-Based? (March 31, 2015). CESifo Working Paper Series No. 5287, Available at SSRN: https://ssrn.com/abstract=2593729 or http://dx.doi.org/10.2139/ssrn.2593729

Charles F. Mason (Contact Author)

University of Wyoming - College of Business - Department of Economics and Finance ( email )

P.O. Box 3985
Laramie, WY 82071-3985
United States
307-766-5336 (Phone)
307-766-5090 (Fax)

Neil A. Wilmot

University of Minnesota - Duluth - Department of Economics ( email )

MN
United States

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