Abstract

This chapter provides a brief overview of some of the key normative challenges in climate change economics with a focus on the social cost of carbon. Welfare functions and its parameter values have a profound effect on the estimates for net costs of climate change on the economy (the social cost of carbon, or SCC), and therefore the net benefits of climate policy. But a large number of assumptions underpinning both the choice of the welfare function to use and the parameter values to calibrate these functions are based on value judgments that are not always clarified or made transparent. Relatedly, the subjective choice of what is included within the boundaries of benefit-cost analysis and whether co-benefits such as improved health are adequately captured can also have a substantial impact on policy recommendations. Moreover, nonmarket damages represent some of the largest expected damages from climate change, but these are often inadequately captured in climate policy models, skewing conclusions about the net costs of climate change to society. Despite these challenges, benefit-cost analysis of different climate policy options, in particular through the use of the SCC, may provide valuable guidance for economic decision-making. But the normative content driving some of the guidance should be made more explicit and, where applicable, should incorporate input from other disciplines and the general public.