Greenhouse gases in the atmosphere affect the climate, the economy, and people’s well-being. The social cost of carbon is an estimate, in dollars, of the economic damages that result from each additional ton of greenhouse gas emissions. It puts the effects of climate change into economic terms to help policymakers understand how emissions-related policies affect the economy.
For policies that affect greenhouse gas emissions, the expected increase or decrease in emissions, in tons, is multiplied by the social cost of carbon, and the result is included as part of the total estimated costs or benefits of the policy.
Let’s look at an example. A city government official is evaluating a policy that would expand their city’s public transit system.
To make an informed decision on whether or not to implement the policy, policymakers often evaluate and sum all of the costs and benefits that will accrue each year into the future. Let’s start by looking at the costs and benefits in just the first year of the policy.
The total infrastructure costs in the first year are estimated to be 50 million dollars. The benefits in the first year are estimated to include 5 million dollars in revenue from increased ridership and 10 million dollars in health benefits from decreased local air pollution and increased walking.
In order to calculate the policy’s climate benefits in a given year, we need to multiply the reduction in CO2 emissions by the social cost of carbon. This policy will reduce carbon dioxide emissions by an estimated 100,000 metric tons of CO2 per year. If, for example, the social cost of carbon is estimated as $50 per metric ton, then the benefits from avoided climate damages would equal 5 million dollars in the first year.
Looking at just the first year of the policy, the 50 million dollars of costs exceed the benefits, which add up to 20 million dollars. For a full benefit-cost analysis, however, the government official would continue adding up the ongoing costs and benefits for a number of years into the future. Because infrastructure costs primarily occur in the first few years and benefits from emissions reductions will continue each year into the future, the total benefits from the project may outweigh the total cost of the project in just a few years.
Without the social cost of carbon to account for the climate benefits of policies, the ongoing benefits of avoided climate change might be missed in policy analysis assessing other costs and benefits.
The social cost of carbon is used around the world to inform billions of dollars of policy and investment decisions.
- The federal government has used it in analysis of over 150 proposed and final regulations.
- States like New York, Illinois, Colorado, Minnesota, Washington, and California use the social cost of carbon for policy analysis or implementation.
- The Canadian government has adopted the estimation methodology.
- Federal carbon tax proposals have suggested a starting tax level based on the social cost of carbon.
RFF is engaged in an effort to improve the scientific basis and transparency of estimates of the social cost of carbon. Learn more at rff.org/scc.