Martin Hänsel, University of Leipzig

"Relative Price Changes and Climate Policy under Heterogeneous Environmental Goods Dynamics"

Abstract

Climate change impacts human well-being not only through damages to market goods but also by affecting non-market goods such as environmental amenities. Previous analyses account for how climate change affects environmental goods as a direct source of well-being, but typically assume a homogeneous aggregate environmental good. This assumption neglects how heterogeneity within a stylized composite environmental good may drive environmental scarcity and its effect on climate policy evaluation. Here, we study how the dynamics of heterogeneous environmental goods impact relative price changes between market and non-market goods and the social cost of carbon (SCC) in a variant of Nordhaus’ integrated assessment model DICE. We examine how relative price changes and climate policy outcomes critically depend on (i) the calibration strategy for climate damages on environmental goods, (ii) the management regime ranging from optimal policy to heterogeneous management and business as usual, and (iii) assumptions on the substitutability between market and non-market environmental goods as well as across environmental goods. We find that while limited substitutability between market and non-market goods remains a key driver of relative price changes and the SCC, the SCC can be more sensitive to substitutability among the non-market environmental goods than across the market good and the environmental composite.

Contact person: Frikk Nesje