Published on Wednesday, April 5, 2023 | Updated on Wednesday, April 5, 2023

Document number 23/04

Global | Social Welfare and the Social Cost of Carbon

The average social welfare in OECD countries would have decreased by 1.9% during the past decade if the damages caused by CO2 emissions had been internalized. Nevertheless, a net intertemporal gain could have been achieved by preventing the most severe future outcomes of global warming, which entail a substantial cost.

Key points

  • Key points:
  • GDP per capita is an incomplete indicator of a society's economic welfare, as it fails to account for inequality, access to leisure time, and life expectancy. In addition, the production of CO2 emissions, which is often necessary to support high levels of consumption, can result in significant economic damages. Thus, it is reasonable to consider the social cost of carbon and factor it into the measurement of welfare.
  • This research expands on the monetary welfare index proposed by Jones and Klenow (2016) by incorporating per capita consumption after factoring in the damage caused by CO2 emissions. The social cost of carbon is calibrated based on the proposal by Golosov et al. (2014), which suggests an optimal price proportional to GDP.
  • Internalizing the social cost of carbon reduced welfare by approximately 2% on average in the last decade, but with significant differences between countries. As most of the countries have greater levels of CO2 emissions consumed than produced, optimally taxing consumed emissions would have entailed an additional 0.6% welfare decrease.
  • The relationship between welfare and the discount rate used to calculate the social cost of carbon is not linear. Additionally, a social cost of carbon that assigns a higher probability to a catastrophic scenario significantly reduces welfare.
  • When considering the extended measure of social welfare, the per capita GDP gap between Spain and the US is halved. Spain fares well in terms of life expectancy and leisure time compared to other countries in the sample. However, it faces challenges with lower levels of consumption and a more unequal distribution. Incorporating CO2 emissions into the calculation reduces welfare in Spain by 1.5 percentage points, a correction lower than the average.

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