The Social Cost of Carbon: A Report for the Economics for Equity and the Environment Network

Executive Summary:

In its first attempts to regulate carbon emissions, the U.S. government is undermining its own efforts by relying on deeply flawed economic models that lead to gross miscalculations of the impact of carbon on the climate and on the nation’s economic future.

Agencies seeking to incorporate climate change considerations in rules and regulations often rely on a cost-benefit analysis, weighing the cost of curbing emissions against the expected damages from every ton of carbon dioxide (CO2) that goes into the atmosphere — a value known as the “social cost of carbon” (SCC).  The higher the SCC, the more stringent the regulatory standards: If it’s $5, say, only regulations that cost less than $5 to implement would be deemed worthwhile; if it’s $500, the demands imposed on polluters could be 100 times more costly.  While no definite SCC has been set so far, an interagency working group has endorsed a “central” estimate of $21 per ton of CO2 in 2010, or roughly 20 cents per gallon of gasoline — far too small a price incentive to prompt substantive mitigation measures.  If widely adopted, this low estimate of the SCC could result in ineffectual regulations that would barely reduce U.S. emissions, if at all.

The proposed SCC value is so low due to very specific, erroneous choices, starting with a narrow reading of the climate economics literature that considers only three models, FUND, PAGE, and DICE.  All three are problematic: FUND mistakenly predicts a huge reduction in mortality from warming, then values the lives supposedly saved on the basis of their per capita incomes.  As a result, it makes the morally offensive assumption that human lives in poor countries are worth less than in rich ones.  PAGE has produced a wide range of estimates, the higher of which the working group ignored, and most of its estimates assume that developed nations will adapt to climate change at near-zero cost.  DICE assumes on very thin evidence that most people in the world would prefer a warmer climate, and recommends a very slow “climate policy ramp” as a result.

The working group has also been overly aggressive in discounting the value of future costs, using rates of 2.5 to 5 percent per year.  At the “central” estimate of 3 percent, the present-day value of $100 in damages a century from now shrinks to as little as $5.  Because the costs today will benefit not those who incur them, but future generations, the choice of a discount rate is really an ethical judgment.  For these reasons, we advocate lower discount rates and/or decreasing rates over time.

The working group’s estimates of the SCC largely omit the widely discussed risks of catastrophic climate damage.  While the average expected damages from climate change are substantial, the credible worst-case outcomes are disastrously greater; the urgent priority is to avoid those worst-case scenarios.  Policy designed from this perspective would not rely on cost-benefit calculations, but would set a “safe” minimum standard, based on the scientific analysis of potential risks, and determine the least-cost strategies to meet it.  The “cost” of carbon emissions would equal the cost of those strategies.

Different choices on any of these points would have led to a higher price on carbon emissions and, as a result, to the recommendation of more stringent regulations.  We do not have enough data to determine what the “correct” value should be, but believe there is a need for more research, examining the full range of available studies of climate damages and costs, and analyzing assumptions about the risks and magnitudes of potential climate catastrophes.

Carbon concentrations are already too high; there were 280 parts per million (ppm) of CO2 in the atmosphere before the industrial revolution, in 1750, and now there are 385 ppm.  If current trends continue, we will reach 560 ppm within this century, increasing the average global temperature by 3° – 6°C (5.4° – 11°F).  The average American caused 21 tons of CO2 emissions in 2005; there is an immediate need for effective, science-based climate policy to dramatically reduce those emissions.

In the United Kingdom, which started estimating prices for carbon emissions several years ago, the government’s latest calculation is a range of $41 – $124 per ton of CO2, with a central case of $83.  An expanded calculation of carbon prices for the United States should at least explore prices in this range, and should be open to considering the full range of implications of the extensive research that is needed to compute a better estimate of the cost of carbon emissions.

Full Text:

Frank Ackerman is Director of the Climate Economics Group at the Stockholm Environment Institute-US Center.  Elizabeth A. Stanton is Senior Scientist for the Stockholm Environment Institute-US Center.  This report was published by the Economics for Equity and the Environment Network on 1 April 2010.

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