The Social Cost of Carbon, The Most Important Number You’ve Probably Never Heard of

Written by Joey Sausville
 · August 30, 2023
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As Californians are well aware, wildfires, floods, and other extreme weather events are striking the Golden State with increasing frequency. Hurricane Hilary was the most recent reminder of the unpredictable and concerning effects of climate events. And outside of California, the Maui Fires were yet another grim example of how natural disasters can devastate communities. We know that global warming exacerbates these kinds of events and requires immediate action. But many of us may feel discouraged when faced with this reality, especially when our government isn’t taking enough action on this monumental issue. Recently, a lesser-known concept called the Social Cost of Carbon (SCC) has resurfaced in discussions about how to reduce emissions and slow climate change. Experts believe the SCC could empower lawmakers to better account for global warming and play an important role in curbing emissions moving forward. But if this is the case, why have most people never heard of it? This article tackles what the SCC is, how it can be used for policy, and important issues and risks to consider.

Carbon dioxide carries a cost

The SCC is a complicated and controversial concept, mainly discussed by experts in climate science, public policy, and economics. Despite its importance, its esoteric nature has largely prevented it from entering the mainstream conversation. Conceptually, the SCC represents the cost in dollars of a given ton of anthropogenic carbon dioxide emitted. The underlying reasoning is that carbon emissions from human activities lead to global warming, giving rise to various costs or harms over time. The SCC aims to quantify these harms by taking into account negative economic impacts on human communities. (It’s worth noting that non-human communities are excluded from the calculation, which may raise a red flag for some.) You can also think of this number as the cost associated with damages resulting from carbon emissions, in units of dollars per ton of carbon dioxide. This means that preventing one ton from being emitted saves the same amount of dollars by preventing these damages. 

 

hurricane hilary causes street flooding at Ciudad Constitución, Baja California Sur (August 18, 2023). photo credit: Modokai on facebook (wikimedia commons)

 

It all adds up

However, this framework is complicated because it is difficult, perhaps impossible, to account for the myriad ways climate change harms human economies. 

For example, changes in temperature and weather are detrimental to agriculture, increase demand for energy, and cause property damage due to rising sea levels. And the list certainly doesn’t end there. How can we account for all of these costs, many of which take effect on a global scale, to assess the true impact of pollution? This question is cause for endless controversy among academics of various disciplines. Briefly, economists and climate scientists use what are called Integrated Assessment Models (IAM’s) that aim to capture the pathway through which emissions lead to a change in atmospheric concentrations. They then model future scenarios with different levels of emissions and compare the resulting damages on human communities. This allows them to isolate the effects of the emissions and calculate their cost in dollars by assessing their economic impacts.

Used in a policy scenario, the SCC allows politicians to factor in the costs and benefits of a given policy or government program as it relates to emissions. For example, a policy to expand a city might increase emissions by x tons over 100 years. If we multiply that by the social cost of carbon, we are left with a dollar amount. We can use this number to quantify the damages associated with pollution and determine if the policy makes financial sense. This framework also applies to policies that mitigate carbon, like more aggressive fuel performance standards for automobiles. In this way, the SCC functions as an important part of the required cost benefit analysis used by agencies to evaluate policies. Ideally, it could be instrumental in justifying more aggressive climate legislation.

A little history

The SCC was first developed and used by the U.S. government during the Bush presidency, in the wake of a court decision that found that the administration’s fuel economy standards did not adequately take into account the economic damages associated with carbon dioxide emissions. The Obama administration subsequently launched an interagency working group to research and guide policy on this topic in 2009. With the working group’s help, the Obama administration initially estimated the social cost of carbon at $43 per ton and updated the SCC in 2010 and 2013 to reflect continued improvements in models. This meant that federal lawmakers began factoring this economic consideration into the policy process, and a few states have adopted it for their own uses. Ultimately, higher SCC could provide policymakers with a strong economic justification for  the more ambitious climate policies — such as carbon taxes — we need. Sounds alright so far, but making the SCC work for the planet is more complicated than that in practice.

 

an industrial facility releases pollution and carbon emissions. photo credit: pexels

 

A shift in methods

For better or worse, the executive branch has the power to set the SCC for federal use. When President Trump came to office, he disbanded the interagency team working on this issue, and his E.P.A. came up with its own “interim” social cost of carbon of $1 to $7 using different methodology. But the vast majority of economists actually favor a higher SCC, and most experts would be more likely to view the Trump-era revaluing as an example of bad-faith political behavior rather than a lack of conclusive science. According to Laura Grant, an environmental economist and professor at the Robert Day School of Economics and Finance at Claremont McKenna College, “economists unanimously agree about having a cost of carbon with real teeth… we agree that this is something we need to price in and account for. And we’re all on the same page. And that happens with almost nothing.” Given the high degree of influence of the field of economics in the U.S government, this is no small thing with regards to moving the policy needle looking forward.

 

photo credit: ana lanza on Unsplash

 

But Grant also rightfully admonishes that no model is perfect. Scholars have raised legitimate criticisms of IAM models for their inability to account for uncertainty further out into the future, among other important factors. (Carbon emissions affect the planet for hundreds of years.) For example, how do they account for tipping points, or critical thresholds that lead to large and often irreversible changes in the climate system? What about large-scale disasters like the Maui fires that are exacerbated by climate change but involve a confluence of other factors as well? Some experts have even argued that the IAMs used by powerful bodies like the interagency working group and the Intergovernmental Panel on Climate Change (IPCC) are deeply flawed and overrated as policy tools. 

Concluding thoughts

And there remains the elephant sized question of whether it is possible to place a dollar value on the true damages of climate change in the first place. When framing such issues, a popular academic quote often credited to statistician Stephen Box provides some clarity: “all models are wrong, but some are useful.” It is impossible to model climate even close to perfectly, but it’s clear that economic models can be useful for disincentivizing carbon emissions in the political process. However, given that the planet is at stake, we ought to question these models rigorously, particularly given their obvious limitations and apparent tendency towards underestimation. We ought to question whether the SCC can ever be high enough.

Further Reading: 

EPA Fact Sheet

Video of Brookings Panel on SCC

Biden Administration Raises Social Cost of Carbon back to levels comparable to the Obama Administration

Sherry Listgarten discussion on A New Shade of Green” blog


Joey Sausville

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