Inequality and the Social Cost of Carbon

We present a novel way to disentangle inequality aversion over time from inequality aversion between regions in the computation of the social cost of carbon. Our approach nests a standard efficiency based estimate and an equity weighted estimate as special cases. We use two integrated assessment models (FUND and RICE) to present quantitative estimates of the social cost of carbon. Our results suggest that inequality considerations lead to higher (lower) social cost of carbon values in high (low) income regions relative to an efficiency based approach, but that the effect is less strong than found in previous studies that used equity weighting. Our central estimate is that the social cost of carbon increases roughly by a factor of two to three, and even more for higher degrees of inequality aversion, when our disentangled equity weighting approach is used.