Social cost of carbon
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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 to focus on taking corrective measures on climate change which can be deemed a form of market failure. An intuitive way of looking at this is as follows: if the price of carbon is $50 per tonne in 2030, and we currently have a technology that can reduce emissions by 1 million metric tonnes in 2030, then any investment amount below $50 million minus interests would make economic sense, while any amount over that would lead us to consider investing the money somewhere else, and paying to reduce emissions in 2030.
Calculating the SCC requires estimating the residence time of carbon dioxide in the atmosphere, along with estimating the impacts of climate change. The impact of the extra tonne of carbon dioxide in the atmosphere must then be converted to equivalent impacts on climate and human health, as measured by the amount of damage done and the cost to fix it. In economics, comparing impacts over time requires a discount rate. 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 (e.g., 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, different valuations of economic and non-economic impacts, 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 discount rate that is pegged to current market interest rates, as we should treat efforts to reduce carbon dioxide emissions just like we treat any other economic activity. 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.
Relationship to carbon tax
According to economic theory, if SCC estimates were complete and markets perfect, a carbon tax should be set equal to the SCC. Emission permits would also have a value equal to the SCC. In reality, however, markets are not perfect, SCC estimates are not complete, and externalities in the market are difficult to calculate accurately, resulting in an inaccurate carbon tax (Yohe et al.., 2007:823). The 2018 IPCC report suggested that a tax of hundreds or even thousands of dollars per ton would be needed to drive carbon emissions to zero.
Recent large studies estimate the social cost of carbon as high as $417 tCO2 or as low as $54 tCO2. Both those studies subsume wide ranges; the latter is a meta-study whose source estimates range from -$13.36 to $2,386.91. 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.
Use in investment decisions
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.
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The SCC is claimed to be 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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