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arXiv · 2502.01394

The Weitzman Premium on the Social Cost of Carbon

Jinchi Dong·Richard S. J. Tol·Fangzhi Wang
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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 generalise Weitzman's (2001, AER) gamma discounting to zero-inflation and two dimensions but find that the analytical solution is a poor approximation of the non-parametric heterogeneity. 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.

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Jinchi Dong, Richard S. J. Tol, Fangzhi Wang. 2025-02-03. The Weitzman Premium on the Social Cost of Carbon. https://arxiv.org/abs/2502.01394

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