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Relative prices and climate policy: How the scarcity of nonmarket goods drives policy evaluation

Authors

Drupp,  Moritz A.
External Organizations;

/persons/resource/Martin.Haensel

Hänsel,  Martin C.
Potsdam Institute for Climate Impact Research;

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Citation

Drupp, M. A., Hänsel, M. C. (2021): Relative prices and climate policy: How the scarcity of nonmarket goods drives policy evaluation. - American Economic Journal: Economic Policy, 13, 1, 168-201.
https://doi.org/10.1257/pol.20180760


Cite as: https://publications.pik-potsdam.de/pubman/item/item_25437
Abstract
Climate change not only impacts production and market consumption but also the relative scarcity of nonmarket goods, such as environmen-tal 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 pro-pose 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.