Blog Post

A Global Perspective on the Social Cost of Carbon

Oct 4, 2013 | Joel Darmstadter, Jan Mares

Some recent posts examining estimates of the social cost of carbon (SCC) noted that the SCC applies to the world as a whole: it is the global concentration of CO2—irrespective of the geographic origin of emissions—that prompts concern over climate change. How does that fact translate into costs facing one or another CO2-emitting country?

However a SCC (or some equivalent metric) serves as the basis for a policy instrument (say, a carbon tax), the path to a binding global agreement is almost certain to be bumpy. Indeed, some of that bumpiness is evident from issues that have already received prominent attention. Equity is a central matter, as nations in different stages of development confront the burden of reducing their contribution to worldwide emissions. Take the United States and India, with the latter’s GDP per capita less than nine percent that of the former. Actually, the two economies' carbon intensity (that is carbon emissions relative to GDP) is about the same. But, clearly, Americans, on average, have a lot more discretionary income to devote to the costs of reducing emissions than average Indians, pressed by the burden of health, housing, education, food and innumerable other preempted necessities within a limited budget.

 Two eminent legal scholars—Eric Posner and Cass Sunstein—addressed the equity question in a wide-ranging article five years ago.  The essence of their argument is that significant greenhouse gas “reductions would likely impose especially large costs on the United States, and recent projections suggest that the United States is not among the nations most at risk from climate change.” This prompts the authors to question what would be served if the United States “were to reduce its greenhouse gas emissions beyond the point that is justified by its own self-interest, simply because the United States is wealthy, and because the nations most at risk from climate change are poor.” Posner and Sunstein do not question the desirability of the haves of the world assisting the have-nots in their aspirations for economic progress. But rather than tie such assistance to greenhouse gas reductions, they contend that it “would be much better to give cash payments directly to people who are now poor.” Whether or not Posner and Sunstein, writing today, would stand by their judgment of five years ago, we believe the argument for moving forcefully on worldwide climate mitigation steps warrants a considerably more nuanced perspective on the assistance question. Specifically, we question the tractability of applying a country-specific benefit-cost calculus to guide participation in global emission reduction.

Indeed, we would argue that acceptance of a “distributive justice” element has for some time been a recognized component of an international climate agreement, no matter how ragged negotiations over such an agreement have frequently been and how piecemeal the few accords on climate have actually been forged. The Kyoto Protocol, adopted in 1997, recognized the problem by imposing binding emission obligations on only 37 of its 192 participating. In the intervening years, numerous assistance programs aimed primarily, if not exclusively, at greenhouse gas reduction have been pursued.

 One important vehicle for assisting environmentally sound energy projects in developing countries is the use of preferential financing terms by the World Bank or, in the U.S., the Export-Import Bank and the Overseas Private Investment Corporation (OPIC). In the past, such assistance (which, to be clear, is designed to concurrently benefit U.S. exporters and manufacturers) has not discriminated between recipient countries’ fossil and renewable projects. Since 2009 such financing assistance has been limited to renewable energy projects—the result of congressional legislation which, in our view, is unnecessarily restrictive. Keep in mind that fossil electricity remains, for now, a dominant source of power in many developing economies. And improving the environmental performance of such existing facilities—say, through combustion retrofits, improved flue gas capture of SOx­, NOx, and mercury in coal plants, and opportunities for coal-to natural gas shifts—would seem to deserve a less arbitrary denial of assistance.

Assuredly, effective assistance programs must be conditioned on at least some shared financial obligation on the part of aided countries. Otherwise, there’d be an incentive to try and shift the entire burden to donors. Aid might additionally be linked to removal of energy-wasteful subsidies. Neither condition need hinder pursuit of sound carbon-mitigation efforts around the world.