Blog Post

Towards an Agreed-Upon Social Cost of Carbon

Sep 4, 2013 | Joel Darmstadter

 Interagency Working Group on Social Cost of Carbon
Source: Interagency Working Group on Social Cost of Carbon

The social cost of carbon (SCC) is a monetary estimate of the global external (i.e., non-market) costs from a ton of CO2 (or greenhouse gas equivalent) emissions. These costs include, among other things, damages related to sea level rise, more frequent storms, and higher temperatures. These effects will vary over time but the SCC is an attempt to account for long-term effects of each ton. Thus, how future external costs are discounted in order to arrive at their present value equivalent is an important element of such a metric.

The SCC is important because of the need to make efficient choices about carbon mitigation policy. If the last ton of CO2 reduced reduces damages by $40 but the costs to reduce that ton are only $30, we know that the net benefits of the policy can be increased by reducing even more CO2, and will continue to do so until the generally rising marginal costs of mitigation equal the constant or falling marginal benefits. From a policy perspective, this marginal benefit is thereby also an indication of the size of a carbon tax needed to efficiently mitigate climate-related damages.

Unanimous acceptance  of such an estimated number is nearly impossible – not only because of the enormity of quantitative information needed to obtain credible numbers but, as well because of  some fundamental disagreements among natural and social scientists. In light of these issues, the best that can be expected is a broad consensus of a range of SCC numbers that guide, but do not dictate, climate policy. Fortunately, many researchers are pursuing this elusive goal. A few months ago, a federal Interagency Task Force Working Group, updating a similar 2010 effort, issued an estimated range of dollar values for the SCC under different base years and discount rates..  The Task Force Working Group's present-value estimate of that long-run impact from a 2020 perspective using a 3 percent discount rate– is $43 in 2007 dollars or about 65 percent greater than the magnitude calculated just two years earlier.

How has this Task Force Working Group analysis fared in the research and policy community? It is premature to try and convey a statistically meaningful sampling of responses. But some initial soundings are worth noting.

Environmental Defense Fund economist Thomas Sterner noted "The new cost figure is a welcome step forward, reflecting the latest versions of the underlying models. The bad news is that the increased number also shows that our lack of a comprehensive climate policy is becoming ever more costly." Last month, one of us used the Interagency SCC to judge how a calibrated penalty on fossil-fuel combustion to overcome a market failure would affect the cost of electric generation. In more political circles, members of Congress have pressed for greater information from both the Executive Branch and the Government Accountability Office (GAO) on the models and estimating procedure that underlie the SCC calculations. Law professor Eric Posner questions some of the underlying assumptions made by the SCC estimate and whether it can legally serve as the basis for regulatory policy.

One of the more spirited, and critical, responses to the Interagency Working Group’s work—its methodology and policy implications -- has been lodged by Prof. Robert Pindyck, an economist at MIT. More on that in our next post.