Transport, Energy and Climate Economics (TrEnCE) - Next session

Speaker: Romano Tarsia - London School of Economics

Paper: Beneath the trees: the influence of natural capital on shadow price dynamics in a macroeconomic model with uncertainty

Abstract: We investigate how incorporating natural capital into a macroeconomic framework affects optimal economic allocation and climate policy under uncertainty. We develop a dynamic stochastic general equilibrium model in which output depends on both conventional inputs as well as renewable and non-renewable natural capitals. Rising temperatures degrade these stocks through input-specific climate damage functions. We estimate both the elasticities of substitution between natural capital and other inputs, and the magnitude of climate-induced damages. Using these estimates, we quantify the impact of natural capital dynamics on shadow prices and the social cost of carbon (SCC). We find that incorporating natural capital increases the SCC by approximately 12% relative to a benchmark DICE-type model. In addition, SCC estimates are highly sensitive to the elasticity of substitution between production inputs. Under stochastic productivity and temperature shocks, the SCC rises by 39% in our baseline parametrization.

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