Beneath the trees: the influence of natural capital on shadow price dynamics in a macroeconomic model with uncertainty

Benmir, Ghassane, Mori, Aditya, Roman, Josselin and Tarsia, Romano (2025) Beneath the trees: the influence of natural capital on shadow price dynamics in a macroeconomic model with uncertainty. Grantham Research Institute on Climate Change and the Environment Working Papers (420). Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science, London, UK.

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Abstract

We investigate the impact of incorporating natural capital dynamics on optimal allocation in an economy subject to uncertainty. We present new estimates on climate damages to natural capital and elasticities of substitution between natural capital and other production inputs. Using these estimates, we examine how shadow prices vary across model specifications and parameter calibrations. Our findings indicate that the social cost of carbon is 12 percent higher in a model incorporating natural capital compared to a standard DICE-type model. Furthermore, the social cost of carbon is highly sensitive to the elasticity of substitution in the final output production f unction. Accounting f or t he stochastic nature of productivity further increases the social cost of carbon by 0.13 percent to 39 percent, depending on the inclusion of habit formation.

Item Type:	Monograph (Working Paper)
Official URL:	https://www.lse.ac.uk/granthaminstitute/publicatio...
Additional Information:	© 2025 The Author(s)
Divisions:	Economics Geography and Environment
Subjects:	G Geography. Anthropology. Recreation > GE Environmental Sciences H Social Sciences > HC Economic History and Conditions H Social Sciences > HB Economic Theory
JEL classification:	E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E60 - General Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q2 - Renewable Resources and Conservation > Q20 - General Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q5 - Environmental Economics > Q50 - General
Date Deposited:	23 Jun 2025 10:48
Last Modified:	23 Jun 2025 23:15
URI:	http://eprints.lse.ac.uk/id/eprint/128516

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