The Social Cost of Carbon (SCC) has been called “the most important number that you’ve never heard of,” and represents the economic costs associated with emitting a ton of CO2e (CO2 equivalent).
The SCC, at least in principle, is the $$ value that if internalized into economic decision-making would correct the “economic externality” leading to excessive greenhouse gas (GHG) emissions and climate change.
Although the SCC is intended to be an analytically derived number, in practice an enormously wide range of SCC estimates exist. They range from virtually $0 (or even negative) to more than $1,000/ton, illustrating that there are a lot of variables and assumptions that go into the SCC.
One reason there has been so much focus on the SCC over the years is that it “fits” into our prevailing economic and cost-benefit model of decision-making. But is that the right model for tackling climate change? At an American Economics Association conference several years ago, one panel concluded that the loss of oceans and fisheries to ocean acidification would not be a big deal because fisheries are such a small part of the global economic system.
The slides below illustrate some of the problems associated with conventional economics when it comes to climate change.
There are also key issues associated with calculating the Social Cost of Carbon:
Should we be using Integrated Assessment Models (IAMs) as the basis for SCC calculations? IAMs are extremely simplified models of climate change that ignore all kinds of potential climate change outcomes. From ocean acidification to potential climate-induced conflicts, very costly outcomes are simply not included in SCC estimates.
How risk-averse should the SCC be? If you flip a fair coin enough times you'll end up with a 50:50 distribution of heads and tails. You could bet your right arm on that outcome and be assured of winning the bet. But would you bet your right arm on getting on heads and one tails after just two coin flips? Probably not, since 50% of the time you’d lose your arm. That’s risk adversity, and it’s a key question for the SCC. Most SCC estimates are risk-neutral, in effect running IAMs enough times to arrive at a “most likely” economic outcome. But climate change is a one-way experiment that we’ll only run once, and risk-adversity makes sense. But a risk-averse SCC is a far higher number than is politically palatable.
What’s the right discount rate to use in calculating the SCC? Almost any discount rate will dramatically devalue the economic costs of climate change over longer timeframes. $1,000 of climate damages in the year 2100, for example, might be valued today at just pennies.
These are just a few of the difficult issues associated with utilizing the Social Cost of Carbon in tackling climate change.
The SCC converts the entire topic of climate risk into a simple to visualize $ figure that in principle can be plugged into all sorts of decision-making processes. There’s obviously a double-edged sword aspect to the SCC. If the SCC is set too low, it could effectively serve as a way to delay significant climate change mitigation.
If one accepts the premise that the SCC represents the damage done by each ton of CO2 emissions, it could certainly be argued that each ton of CO2e being emitted to the atmosphere by cars, power plants and other human activities should be charged the SCC to encourage "economically efficient" decision-making. (where that money would go is outside the scope of this thought).
Unfortunately, economists have come up with an enormously wide range of potential SCC values, from virtually $0 (or even negative) to $1,000/ton. While the SCC is intended to be an analytically derived value, and therefore potentially more robust that other carbon pricing mechanisms, the sheer range in SCC values illustrates that there are a lot of key assumptions that go into an SCC analysis. The range in SCC estimates is not primarily the result of different expectations when it comes to climate change. Instead, the range results from variables including:
- The discount rate used in valuing future climate damages
- The level of risk-adversity used in calculating the SCC
- The exclusion of climate impacts like ocean acidification or future climate conflicts from SCC estimates.
Calculating the future damages of climate change and expressing those damages in terms of each ton of CO2 emissions is not new. The Minnesota Public Utilities Commission undertook such an analysis as early as 1991, estimating the SCC at between $0.30 and $3.10 per ton. The Stern Review on the Economics of Climate Change (2006) arrived at a higher figure, about $85/ton. Other estimates have ranged from 0 (and even negative numbers in the short-term) to thousands of dollars per ton based on the prospects for catastrophic climate change.
The SCC concept became a real number for federal rule-making purposes in 2010 when an inter-agency task force arrived at an SCC value of $21/ton for use in NEPA proceedings. The $21/ton value was first used in updating federal fuel efficiency (CAFÉ) standards. The Office of Management and Budget issued guidance requiring the standardized use of the SCC in federal rule making proceedings where GHG emissions needed to be quantified as part of a cost-benefit analysis. In 2014 the Obama Administration revised the federal SCC to $36/ton based on the availability of "better models."
The Trump Administration dramatically reduced the SCC, primarily by deciding that it should only reflect the domestic U.S. damages of emitting a ton of CO2 in the United States, as opposed to the "global damages" estimate used by the Obama Administration.
The Biden Adminstration will almost certainly act to “restore” the federal SCC, and could significantly revise it in an upward direction.
Note that you can dig much more deeply into the Social Cost of Carbon in the Climate Web through topical headings like these:
* [I:SCCCritiques](brain://CBGRtOivf1uKKXqUckGFiA/ISCCCritiques) * [I:SCCandCatastrophicChange](brain://qTJG-ZCgKFmWimdC7hg7qA/ISCCandCatastrophicChange) * [S - Evaluating SCC Estimates](brain://OrdL6_r5hFaAQfVyA_J91g/SEvaluatingSccEstimates) * [S - Federal SCC Determination](brain://DUTBQmc25lioxFTMBwHZgQ/SFederalSccDetermination) * [S - SCC Estimates](brain://ZxP9FHfu0FKY8Fpwj09oAA/SSccEstimates) * [S - SCC Uncertainties](brain://iNL63BaDeVSyv_w3STcwlQ/SSccUncertainties) * [N - SCC Critiques](brain://MQm9EtLeplispyQlSddORA/NSccCritiques) * [N - SCC News - Topical](brain://hRaVw-8_QFad7uWlQbQElQ/NSccNewsTopical) * [N - SCC in Litigation](brain://Lemj60dckFmV-hlODtBHUg/NSccInLitigation) * [E - SCC Social Cost of Carbon](brain://2xy_dBG9BFW1GifuNO7Nvg/ESccSocialCostOfCarbon) * [T - SCC Networks](brain://7Yk_OPlycFCGfejmPEl5Zg/TSccNetworks)
You can also gain access to a lot more explanatory material and insight through our “guides” to the Climate Web.