The Weitzman Premium on the Social Cost of Carbon

TL;DR

This paper introduces the Weitzman premium, showing that preference heterogeneity and uncertainty about discount rates significantly increase the social cost of carbon, with potential increases up to 200 times in sensitivity analyses.

Contribution

It quantifies how preference heterogeneity and discount rate uncertainty amplify the social cost of carbon, providing new calibration and analysis methods.

Findings

Preference heterogeneity increases the social cost of carbon.

Uncertainty about discount rates leads to a hyperbolic discounting effect.

The social cost of carbon can be up to 200 times higher in certain scenarios.

Abstract

Preference heterogeneity massively increases the social cost of carbon. We call this the Weitzman premium. Uncertainty about an exponential discount rate implies a hyperbolic discount rate, which in the near term is equal to the average discount rate but in the long term falls to the minimum discount rate. We calibrate the pure rate of time preference and the inverse of the elasticity of intertemporal substitution of 79,273 individuals from 76 countries and compute the corresponding social cost of carbon. Compared to the social cost of carbon for average time preferences, the average social cost of carbon is 6 times as large in the base calibration, and up to 200 times as large in sensitivity analyses.