More than the sum of its parts: Structural modelling interactions and the social cost of carbon

Abstract
Integrated assessment models (IAMs) play a key role in climate policy analysis, not least for estimating the social cost of CO2 emissions (SCC). The recent literature has documented that structural modelling changes—such as updates to Earth system processes, inclusion of tipping points, consideration of limited substitutability of ecosystem services or natural capital, or allowing for the persistence of damages—are important drivers of SCC estimates. Yet, most existing IAM applications only assess the effect of a single structural modification. Here, we build a modular IAM that is able to systematically combine several of these modifications. This allows us to study how different structural modelling choices interact in shaping SCC estimates, and to compute a compound “structural-interactions SCC”. We find that substantial non-linear interaction effects arise as soon as the model features growth-based damages. As a result, the more comprehensive “structural-interactions SCC” can be both substantially higher (up to around 60 percent) or lower (up to around -30 percent) than the “sum-of-its-parts SCC”, which solely considers the separate effects of the included structural modifications. We find that the time profile of how structural modifications affect climate damages plays a crucial role for the interaction effects and that it is crucial to not only clarify the persistence of climate damages on the economy but also how natural systems and natural capital are affected by climate change.

Recommended citation: Schaumann, F., Anthoff, D., Drupp, M.A., Hänsel, M.C., Moore, F.C., Rennels, L., Rising, J. (in prep.). "More than the sum of its parts: Structural modelling interactions and the social cost of carbon." Mimeo: University of Hamburg.