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. 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. Latest studies calculate costs of more than $3000/tCO
2. The Intergovernmental Panel on Climate Change suggested that a carbon price of $ 135-5.500 in 2030 and $ 245-13.000/tCO
2 in 2050 would be needed to drive carbon emissions to stay below the 1.5°C limit.
Calculating the SCC requires estimating the impacts of climate change. This includes impacts on human health, as measured by the amount of damage done and the cost to fix it. Valuations can be difficult since the impacts on ecosystems do not have a market price. In economics, comparing impacts over time involves a discount rate or time preference. 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".
The wide range of estimates is explained mostly by underlying uncertainties in the science of climate change including 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, treatment of equity, and how potential catastrophic impacts are estimated.
What discount rate to use is "consequential and contentious" 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%. Some, like Nordhaus, advocate for a time discount rate that is pegged to the current average rate of time discount as estimated from market interest rates–this is spurious reasoning because intragenerational interest rates have nothing to do with the intergenerational ones in question. 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. 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.
Carbon pricing recommendationsEdit
According to economic theory, a carbon price should be set equal to the SCC. In reality, carbon tax and carbon emission trading only cover a limited number of countries and sectors.
The 2018 IPCC report suggested that a carbon price of $ 135-5.500 in 2030 and $ 245-13.000/tCO
2 in 2050 would be needed to drive carbon emissions to stay below the 1.5°C limit. This is more than three times higher than for a 2°C limit. Recent large studies estimate the social cost of carbon as high as $417/tCO
2 or as low as $54/tCO
2. Both those studies subsume wide ranges; the latter is a meta-study whose source estimates range from -$13.36/tCO
2 to $2,386.91/tCO
2. 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. In 2021, the study "The social cost of carbon dioxide under climate-economy feedbacks and temperature variability" estimated even costs of more than $3000/tCO
Use in investment decisionsEdit
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.
The SCC is estimated to be high in India, China, Saudi Arabia and the United States.
The US Government was required to take regulatory action on greenhouse gas emissions for the first time after the Supreme court's decision in Massachusetts v. The Environmental Protection Agency(2007). Policy making for the reduction of greenhouse gas emissions and the social cost of carbon was difficult due to the lack of information to assist in correctly measuring the social cost of carbon.
In February 2021 the US government set the social cost of carbon to $51 per tonne, based on a 3% discount rate, but it plans a more thorough review of the issue. The social cost of carbon is used in policymaking.
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. 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). The SCC is no longer used for policy appraisal in the UK or the EU.
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.
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