Basics of Social Cost of Carbon

Governments have many policy options to curb carbon dioxide (CO2) emissions and slow down global warming. There are a wide range of estimates of costs that these policies will impose on governments and taxpayers. If the government doesn’t do anything or do much, society will inevitably pay the price. According to a study by the Institute of Policy Integrity, climate change could cost the world some $1.7 trillion a year by 2025, increasing to about $30 trillion a year by 2075.

The social cost of carbon (SCC) is the monetary value (say, dollars) of the economic damages that would result from emitting one additional ton of greenhouse gases into the atmosphere.

The social cost of carbon is a tool that helps policymakers determine whether the costs and benefits of a proposed policy to curb climate change are justified. A higher SCC generally means that the benefits of a particular climate policy to cut CO2 justify its cost; a low SCC makes a policy seemingly cost more than the benefits it ultimately delivers.

Estimating the dollar amount of SCC requires information that links social, economic and physical features into one framework. This information is then fed into computer models. These models integrate four types of information:

  1. Predict future emissions: These are based on population, economic growth, and other factors.
  2. Model future climate responses: Future emissions are estimated and based on these estimates, the impact is assessed regarding increased temperature and sea-level rise.
  3. Assess the benefits and costs: What will be the impact of climate change on agriculture? What will be the cost of adaptation to sea level rises? What will be the impact of additional warming on energy use? What will be the impact on worker’s productivity?
  4. Convert to present value: Since benefits and costs are likely to accrue over time, policy decisions need to be taken today. Hence you discount the future costs and benefits to today. At what discount rate? It is the discount rate that indicates a willingness to spend today to protect future generations.

Simulation of the three models is run hundreds of thousands of times using different values for uncertain variables and parameters. As a result, many estimates of SCC emerge. SCC is usually represented as a range rather than a single number. An average of all the estimates is taken at a particular discount rate to deliver a representative SCC. A representative computation is shown below:

Source: Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis ­, 2016

We can get a sense of SCC by seeing that it was estimated that India’s country-level social cost of carbon emission the highest at $86 per tonne of CO2 in the world. This means that the Indian economy will lose $86 by emitting each additional tonne of CO2. Next in scale is the US, where the economic damages would be $48 per tonne of CO2 emission and Saudi Arabia at $47 per tonne of CO2 emission.

References

Peter Howard and Derek Sylvan, “Gauging Economic Consequences on Climate Change,” March 2021, accessed on June 10, 2021, https://policyintegrity.org/files/publications/Economic_Consensus_on_Climate.pdf

“Technical Support Document: ­ Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis ­ Under Executive Order 12866,” United States Government, August 2016 accessed on June 10, 2021, https://www.epa.gov/sites/production/files/2016-12/documents/sc_co2_tsd_august_2016.pdf

Kevin Rennert and Cora Kingdon, “Social Cost of Carbon 101, “Resources for the Future, March 30, 2021, accessed on June 10, 2021, https://www.rff.org/publications/explainers/social-cost-carbon-101/

Renee Cho, Social “Cost of Carbon: What Is It, and Why Do We Need to Calculate It?” State of the Planet: Columbia Climate School, April 1, 2021, accessed on June 10, 2021, https://news.climate.columbia.edu/2021/04/01/social-cost-of-carbon/

“Social cost of co2 emission,” Down to Earth, accessed on June 10, 2021, https://www.downtoearth.org.in/dte-infographics/social_cost_corbon/index.html#:~:text=India’s%20country%2Dlevel%20social%20cost,per%20tonne%20of%20CO2%20emission