Endogenous preference for non-market goods in carbon abatement decision

Abstract: Carbon abatement decisions are usually based on the implausible assumption of constant social preference. This paper focuses on a specific case of market and non-market goods, and investigates the optimal climate policy when social preference for them is also changed by climate policy in the DICE model. The relative price of non-market goods grows over time due to increases in both relative scarcity and appreciation of it. Therefore, climbing relative price brings upward the social cost of carbon denominated in terms of market goods. Because abatement decision affects the valuation of non-market goods in the utility function, unlike previous climate-economy models, we solve the model iteratively by taking the obtained abatement rates from the last run as inputs in the current run. The results in baseline calibration advocate a more stringent climate policy, where endogenous social preference to climate policy raises the social cost of carbon further by roughly 12%-18% this century. Moreover, neglecting changing social preference leads to an underestimate of non-market goods damages by 15%. Our results support that climate policy is self-reinforced if it favors more expensive consumption type.