Social cost of carbon

The social cost of carbon (SCC) is the marginal cost of the impacts caused by emitting one extra tonne of greenhouse gas (carbon dioxide equivalent) at any point in time, inclusive of 'non-market' impacts on the environment and human health.[1] The purpose of putting a price on a ton of emitted CO
2 is to aid policymakers or other legislators in evaluating whether a policy designed to curb climate change is justified. The social cost of carbon is a calculation focussed on taking corrective measures on climate change which can be deemed a form of market failure.[2] An intuitive way of looking at this is as follows: if the price of carbon is $50 per tonne in 2030, and we currently have a technology that can reduce emissions by 1 million metric tonnes in 2030, then any investment amount below $50 million minus interests would make economic sense, while any amount over that would lead us to consider investing the money somewhere else, and paying to reduce emissions in 2030.[3]

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See also: Economic impacts of climate change § Marginal impacts

Calculating

Calculating the SCC requires estimating the residence time of carbon dioxide in the atmosphere, along with estimating the impacts of climate change. The impact of the extra tonne of carbon dioxide in the atmosphere must then be converted to equivalent impacts on climate and human health, as measured by the amount of damage done and the cost to fix it. In economics, comparing impacts over time requires a discount rate. This rate determines the weight placed on impacts occurring at different times.

Best estimates of the SCC come from Integrated Assessment Models (IAM) which predict the effects of climate change under various scenarios and allow for calculation of monetized damages. One of the most widely used IAMs is the Dynamic Integrated model of Climate and the Economy (DICE).

The DICE model, developed by William Nordhaus, makes provisions for the calculation of a social cost of carbon. The DICE model defines the SCC to be "equal to the economic impact of a unit of emissions in terms of t-period consumption as a numéraire".[4]

The wide range of estimates is explained mostly by underlying uncertainties in the science of climate change (e.g., the climate sensitivity, which is a measure of the amount of global warming expected for a doubling in the atmospheric concentration of CO
2), different choices of discount rate, different valuations of economic and non-economic impacts, treatment of equity, and how potential catastrophic impacts are estimated.[5]

Discount rate

What discount rate to use is "consequential and contentious"[6] because it defines the relative value of present costs and future damages, an inherently ethical and political judgment. A 2015 survey of 200 general economists found that most preferred a rate between 1% and 3%.[7] Some, like Nordhaus, advocate for a discount rate that is pegged to current market interest rates, as we should treat efforts to reduce carbon dioxide emissions just like we treat any other economic activity. Others, like Stern, propose a much smaller discount rate because "normal" discount rates are skewed when applied over the time scales over which climate change acts.[8] A 2015 survey of 1,100 economists who had published on climate change found that those who estimated discount rates preferred that they decline over time and that explicit ethical considerations be factored in.[9]

Relationship to carbon tax

According to economic theory, if SCC estimates were complete and markets perfect, a carbon tax should be set equal to the SCC. Emission permits would also have a value equal to the SCC. In reality, however, markets are not perfect, SCC estimates are not complete, and externalities in the market are difficult to calculate accurately, resulting in an inaccurate carbon tax (Yohe et al.., 2007:823).[10] The 2018 IPCC report suggested that a tax of hundreds or even thousands of dollars per ton would be needed to drive carbon emissions to zero.[11]

Estimates

Recent large studies estimate the social cost of carbon as high as $417 tCO2[12] or as low as $54 tCO2.[13] Both those studies subsume wide ranges; the latter is a meta-study whose source estimates range from -$13.36 to $2,386.91.[13] Note that the costs derive not from the element carbon, but the molecule carbon dioxide. Each tonne of carbon dioxide consists of about 0.27 tonnes of carbon and 0.73 tonnes of oxygen.[14]

Use in investment decisions

Organizations that take an integrated management approach are using the social cost of carbon to help evaluate investment decisions and guide long term planning in order to consider the full extent of how their operations impact society and the environment. By placing a value on carbon emissions, decision makers can use this value to expand upon traditional financial decision making tools and create new metrics for measuring the short and long term outcomes of their actions. This means taking the triple bottom line a step further and promotes an integrated bottom line (IBL) approach. Prioritizing an IBL approach begins with changing the way we think about traditional financial measurements as these do not take into consideration the full extent of the short and long term impacts of a decision or action. Instead, return on investment can be expanded to return on integration, internal rate of return can evolve into integrated rate of return and instead of focusing on net present value, companies can plan for integrated future value.[15]

By country

The SCC is estimated to be high in India, China, Saudi Arabia and the United States.[16]

United States

The SCC is claimed to be used in policymaking.[17]

Criticism

The SCC has been criticized as being extremely uncertain, having to change over time and according to the level of emissions, and is claimed to be useless to policymakers as the Paris Agreement has a goal of 2°C temperature rise.[18] Calculating the SCC brings about a degree of uncertainty particularly due to unknown future economic growth and development as well as pending climate system response. Furthermore, the figures produced from the SCC cause calculations to be produced on a range with the most commonly utilized number being the central case value (an average over the entire data set at a given discount rate).[2] The SCC is no longer used for policy appraisal in the UK[19] or the EU.[6]

History

The concept of a social cost of carbon was first mooted by the Reagan administration of the United States in 1981. Federal Agencies such as the Environmental Protection Agency and Department of Transportation began to develop other forms of social cost calculations from Carbon during the George H.W Bush Administration. Furthermore, economic social cost from Carbon was judicially mandated in cost-benefit analysis for new policy in 2008 under the U.S. Court of Appeals. The year following in 2009 there was a call for a uniform calculation of social cost from carbon to be utilized by the government.[20]

References
  1. Yohe, G.W.; et al. (2007). "20.6 Global and aggregate impacts; 20.6.1 History and present state of aggregate impact estimates". In M.L. Parry; et al. (eds.). Perspectives on climate change and sustainability. Climate Change 2007: Impacts, Adaptation and Vulnerability. Contribution of Working Group II to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. Cambridge University Press. Archived from the original on 2011-11-07. Retrieved 2011-10-12.
  2. "Social Cost of Carbon 101". Resources for the Future. Retrieved 2020-08-25.
  3. Carbon, Committee on Assessing Approaches to Updating the Social Cost of; Society, Board on Environmental Change and; Education, Division of Behavioral and Social Sciences and; Sciences, National Academies of; Engineering; Medicine, and (2017-01-11). Valuing Climate Damages: Updating Estimation of the Social Cost of Carbon Dioxide (PDF). doi:10.17226/24651. ISBN 9780309454209.
  4. Nordhaus, William D. (2017-02-14). "Revisiting the social cost of carbon". Proceedings of the National Academy of Sciences. 114 (7): 1518–1523. Bibcode:2017PNAS..114.1518N. doi:10.1073/pnas.1609244114. ISSN 0027-8424. PMC 5321009. PMID 28143934.
  5. Yohe, G.W.; et al. (2007). "Executive summary". In M.L. Parry; et al. (eds.). Perspectives on climate change and sustainability. Climate Change 2007: Impacts, Adaptation and Vulnerability. Contribution of Working Group II to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. Cambridge University Press. Archived from the original on 2010-05-02. Retrieved 2011-10-12.
  6. "Q&A: The social cost of carbon". Carbon Brief. 2017-02-14. Retrieved 2019-11-07.
  7. "Discounting disentangled: an expert survey on the determinants of the long-term social discount rate" (PDF). May 2015. Retrieved 2020-05-31.
  8. "Discount rates: A boring thing you should know about (with otters!)". Grist. 2012-09-24. Retrieved 2017-04-28.
  9. "Expert Consensus on the Economics of Climate Change" (PDF). December 2015. Retrieved 2020-05-31.
  10. Yohe, G.W.; et al. (2007). "20.6.1 History and present state of aggregate impact estimates". In M.L. Parry; et al. (eds.). Perspectives on climate change and sustainability. Climate Change 2007: Impacts, Adaptation and Vulnerability. Contribution of Working Group II to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. Cambridge University Press. Archived from the original on 2011-11-08. Retrieved 2011-10-12.
  11. Nisbet, Matthew (2019-05-22). "The IPCC Report is a Wake Up Call for Scholars, Advocates, and Philanthropists". Medium. Archived from the original on 2019-09-02. Retrieved 2019-09-02.
  12. "Country-level social cost of carbon". 28 September 2018. Retrieved 31 May 2020.
  13. Wang, P.; Deng, X.; Zhou, H.; Yu, S. (2019). "Estimates of the social cost of carbon: A review based on meta-analysis". Journal of Cleaner Production. Journal of Cleaner Production 209 (2019) 1494-1507. 209: 1494–1507. doi:10.1016/j.jclepro.2018.11.058.
  14. "Why do carbon dioxide emissions weigh more than the original fuel?". Retrieved 31 May 2020.
  15. Sroufe, Robert (2018). Integrated Management: How Sustainability Creates Value for Any Business. Emerald Publishing. p. 20.
  16. Ricke, Katharine; Drouet, Laurent; Caldeira, Ken; Tavoni, Massimo (2018). "Country-level social cost of carbon". Nature Climate Change. 8 (10): 895–900. doi:10.1038/s41558-018-0282-y. hdl:11311/1099986. ISSN 1758-6798. S2CID 135079412.
  17. Plumer, Brad (2018-08-23). "Trump Put a Low Cost on Carbon Emissions. Here's Why It Matters". The New York Times. ISSN 0362-4331. Retrieved 2019-11-07.
  18. "The social cost of carbon; it's time to kill it". Cambridge Econometrics. 2018-12-04. Retrieved 2019-11-07.
  19. "Carbon valuation". GOV.UK. Retrieved 2019-11-07.
  20. "The true cost of carbon pollution". Environmental Defense Fund. Retrieved 2020-08-25.
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