Correcting the carbon cycle representation: How important is it for the economics of climate change?

Economic analyses of the greenhouse effect are typically carried out within the framework of computable general equilibrium models which represent the climate system by simple two box proxies based upon the pioneering work of Nordhaus. Since errors in predicting the carbon budget can imply high costs, there is some need to include more sophisticated climate models into the economics of global climate change. This paper presents a non-linear pulse representation of the process-based and data-validated Bern carbon model. Compared to the Nordhaus approach this leads to different results with respect to optimal climate policy and atmospheric carbon dioxide concentration. In particular, our results suggest that economic studies which use a Nordhaus representation of the climate system are biased towards high carbon emission and low abatement levels.