Global Carbon Budgeting and the Social Cost of Carbon

The limited availability of natural resources on the global level relates primarily to the influence of fossil energy use on climate change, rather than to the exhaustion of fossil energy resources. In this chapter we consider a version of the Integrated Assessment climate-economy model with overlapping generations and fossil energy as an input in production. In a laissez-faire equilibrium, individuals do not account in their production plans for the negative external effects of carbon dioxide emission. These effects are internalized by a “social planner” solving the problem of optimal accumulation of global wealth and carbon dioxide concentration in the atmosphere. The carbon budget is defined for this problem as the optimal concentration of carbon dioxide in the long term. The social opportunity cost of fossil fuel consumption supporting this budget is given by the present value of marginal welfare losses of future generations. We examine the effects of welfare discounting on the long-term outcome and, in particular, on the welfare of distant future generations.