The Social Cost of Carbon

Scientists expect climate change to have increasingly negative consequences for society, from rising sea levels to more frequent heatwaves. There is broad agreement that initial, modest benefits – for instance, increased yields for some crops in some regions – will be outweighed by costs as temperatures rise.

Even those who see climate change as a relatively minor problem agree that damages will exceed benefits above 1.1C of warming. Moreover, the world is already experiencing record-hot temperatures around 1C above pre-industrial levels. So how much should we be willing to pay to avert future climate damages?

One way to get a handle on this question is through the social cost of carbon (SCC), which tries to add up all the quantifiable costs and benefits of emitting one additional tonne of CO2, in monetary terms. This value can then be used to weigh the benefits of reduced warming against the costs of cutting emissions.

As we will see, estimates of the SCC are highly uncertain. This does not mean the SCC is zero. In fact, there is an argument that this uncertainty actually increases the SCC. This implies that the most rational response would be to mitigate against the risks of warming as a form of climate insurance. To borrow a phrase, the SCC could well be the worst way to value CO2 – except for all the other ways to do it.

…, a couple of important technical points. First, since CO2 emitted today will persist in the atmosphere for thousands of years, the SCC incorporates future costs, discounted into today’s money. …

Second, strictly speaking, the SCC is the social cost of CO2, not simply carbon, and it is usually measured in dollars, pounds or euros per metric tonne of CO2. You might see it shortened to SC-CO2, to distinguish it from estimates of the social cost of methane (SC-CH4). We use SCC throughout this article, referring to CO2.

What’s the point of the social cost of carbon?
Climate change is a classic market failure. The costs of emitting CO2 are borne by society at large, whereas the benefits accrue to those burning fossil fuels. In order to correct the market failure – for instance, with a carbon tax – we need to know the social cost of those CO2 emissions.

Moreover, when governments measure the costs and benefits of a policy or investment decision, they need a value for CO2 emissions. If the SCC is high, then the benefits of cutting CO2 are large and costly climate actions will be justified. If the SCC is low, regulations might be more trouble than they’re worth.

If the world acts like a perfect economic model, then the “optimum” amount of climate effort is where the additional costs of cutting further emissions are balanced by the benefits of limiting further warming. Again, if we are uncertain about the optimum level of mitigation, this doesn’t mean the correct answer is “zero”.

Scientists estimate the social cost of carbon using models that represent our society, the world’s climate and the ways they interact. This is a marriage of physics and economics. There are three main models in use – DICE, FUND and PAGE. …
These integrated assessment models (IAMs) join together four elements.

First, there are socioeconomic projections: How many people will be alive in 2150? How fast will the economy grow next century? How much CO2 will humans emit?

Second, there is a “climate module”: How will the climate change in response to CO2 emissions? How quickly will sea levels or temperatures increase? What about rainfall patterns and extreme weather events?

Third is benefits and damages: How will climate change affect crop yields? What is the cost of living with, or adapting to sea level rise? How do increased temperatures affect labour productivity or energy use for heating and cooling? How can we value non-market impacts, such as loss of species and habitats?'

Finally, the fourth element uses discounting to value future benefits and costs in today’s money. Future damages tend to dominate SCC estimates, because CO2 persists in the atmosphere for thousands of years and damages increase as temperatures rise. As a result, discounting has a big impact.Each of the four elements in the models is uncertain and incomplete. They also interact strongly. For instance, sea level rise could damage property and reduce future economic growth…

[…]
In the US, the SCC is more than just an academic exercise — it informs how the government makes its policies.

According to a search of the government Federal Register, the SCC is currently a factor in 69 final rules and a further 80 proposed rules. According to a recent paper, regulations written to include the SCC in the US have more than $1tn of benefits. Such regulations generally consist of energy-saving programs, forest conservation, fuel-economy standards, and emissions performance standards, including the Clean Power Plan.

Agencies are encouraged to consider all four calculated values for the SCC when drawing up rules, reflecting the different discount rates and the one high-end scenario.

What’s the future for the SCC under the Trump administration?
There have been early indications that Trump’s team will target the SCC, as they go about the process of trying to unravel Obama’s climate policies.

Trump’s personal engagement with the SCC has been brief, but to the point. In 2016, at the start of his campaign, he gave the following answers to a questionnaire sent by the American Energy Alliance:
the start of his campaign, he gave the following answers to a questionnaire sent by the American Energy Alliance:
Social cost of carbon quote

8) Do you support a carbon tax? Do you support the Obama administration's use of the social cost of carbon in rulemakings?

No and No.

Do you think that federal agencies have abused the cost-benefit process to suit their political agenda? Would your administration end the process of underestimating the cost and inflating benefits of Agency regulations?

Yes and Yes.

Donald Trump in 2016 on the social cost of carbon. Source: American Energy Alliance questionnaire

It’s clear that those surrounding him are no fans of the metric. A questionnaire sent by Trump’s transition team, which they later disavowed, to the Department of Energy asked:

“Can you provide a list of all Department of Energy employees or contractors who have attended any Interagency Working Group on Social Cost of Carbon meetings? Can you provide a list of when those meetings were and any materials distributed at those meetings, email associated with those meetings, or materials created by Department employees or contractors in anticipation of or as a result of those meetings?”

In addition, Tom Pyle, head of Trump’s transition energy team, sent out a memorandum referencing the SCC. Under the heading, “Ending the use of the social cost of carbon in federal rulemakings”, it says:

“The Obama administration aggressively used the social cost of carbon (SCC) to help justify their regulations. During the Trump administration the SCC will likely be reviewed and the latest science brought to bear. If the SCC were subjected to the latest science, it would certainly be much lower than what the Obama administration has been using."

Many Republicans are against the SCC.
(From multiple authors, carbonbrief.org, 2/14/17)

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