Anthropogenic CO_2 emissions are largely admitted
without direct economic consequences to the emitter.
But these emissions are causing
significant changes to the environment
that have real economic impacts.
In order to assess the economic
impacts of climate change,
economists and climate scientists have
come together to try to define what
is known as the social cost of
carbon. What is this value?
How is it calculated, and how can governments,
corporations, and the average individual use
it to help reduce carbon emissions?
To help us answer these questions,
we spoke with two leading experts,
Tamma Carleton, affiliate of the Climate Impact Lab,
and assistant professor of Economics at
UC Santa Barbara and Robert Kopp,
climate scientist and director of
the Rutgers Institute of Earth
Ocean Atmospheric Sciences and
Co-Director of the Climate Impact Lab.
What is the social cost of carbon?
Is the most important number you've never heard of.
But the social cost of carbon is
an attempt to monetize all of
the social and economic harms that occur from
every ton of emissions
that we release into the atmosphere.
Every time we drive our cars,
we ramp up production and
manufacturing facility that increase in emissions into
the atmosphere will lead to
a small change in our global climate
and the social cost of carbon is our attempt to
monetize all of the many damages that,
that additional amount of warming will cost.
These damages span from crop losses in
the US Midwest to migration
within and across country borders
to increase health risk,
and we're trying to bundle all of those damages into
one dollar value called the social cost of carbon.
To phrase this another way,
if we expect a certain amount of dollars in
economic damages in the future
are caused by carbon emissions,
we should be willing to pay something
today to avoid those future costs.
But what exactly should this number be?
How if policymakers in
the United States approach this question so far?
In the last year of the Bush administration,
different agencies started
taking various different approaches
to estimating what is
the value to society
of reducing carbon dioxide emissions by a ton.
In 2009 when
the Obama administration came in and they said,
what we actually need is
standardized approach to this
that's used consistently across
agencies and we're going to look at
how the global economy changes
in response to that extra ton of CO_2.
Then we're going to look at that difference.
The difference is that additional damage
caused by that ton of CO_2 and then we're going to do
some economic magic known as discounting to turn
this time series of future damages over the next several
hundred years into a single number that we value today.
That's how you measure the social work department.
The key steps are producing
estimates of future emissions and economic growth.
Turning those into projections
of future physical climate change,
and turning those projections of
future physical climate change into
estimates of human impacts
and associated economic damages,
and then discounting them
into a present value that will return.
Now, unless you're an economist,
the term discount rate
may not be one you're familiar with,
but it's a very important variable
in calculating the social cost of carbon.
The discount rate is
an incredibly important parameter
in social cost of carbon calculation.
Every time we emit a ton of carbon,
the impact on the global climate
takes hundreds of years to fully materialize.
That means we need to be thinking
about how we can monetize impacts
that happened to my children and
my grandchildren when I'm counting the value today.
That's very difficult problem.
It's ethically challenging, philosophically challenging.
One of the key most objective ways
to think about why this number should be there.
Why we shouldn't even think about
discounting the future relative to the present,
is that we know we sort for the idea that $100
is worth a whole lot more
to a poor person than to a rich person.
When we think about the future,
we know that on average,
GDP is growing around the world.
People are likely to be
richer in the future than they are today.
When they realize that
$100 of damage from climate change,
it will matter less to them than it
will today because they're likely to be returned.
Even putting ethics and
philosophy aside about how much I care
about my future grandchildren relative to myself.
Even if we try to set that aside,
there's still an argument for
discounting the future purely
based on the idea that on
average population are likely to be richer.
The discount rate is the measure of
the present value of future costs to society.
This means that if you predict a future
where the economy will grow faster
and is more capable of paying for
the expected damages of climate change,
then that implies a higher discount rate
and therefore a lower cost of carbon today.
If on the other hand,
do you think the economy will grow more slowly and we'll
be less able to bear the burden of future damages,
then you have to assume a lower discount rate
and therefore a higher cost of carbon today.
During the Obama administration,
the central discount rate was set
at three percent resulting in
a social cost of carbon around $51 per ton of CO_2.
During the Trump administration,
the discount rate ranged between three and seven percent.
The higher rates were based on the assumption that
the US economy is going to grow rapidly.
Additionally, the Trump administration only factored in
US damages as opposed to global damages,
resulting in a social cost of carbon
between one dollar and seven dollars.
On the first day of the Biden administration in 2021,
President Biden signed an executive order temporarily
restoring the discount rate to
the Obama era three percent.
This interim value will be used
until the end of 2021 when
the Biden administration is expected to release
a new official value for the social cost of carbon.
This new value will theoretically help
the United States reach ambitious climate goals,
such as building a net-zero economy by 2050.
According to Tamma Carleton's research,
a more accurate discount rate would
be no higher than two percent,
which would put the social cost of carbon at around $125.
How is this social cost of carbon
used in the creation of federal policy?
If you're writing a fuel efficiency standards,
if you are writing an appliance efficiency standards,
you're writing a power plant regulation.
How do you value the benefits of reduced climate change?
The Obama administration also
started to branch out into looking at things
like the environmental impacts
associated with leasing and public land,
and the Biden executive order specifically calls for
the Interagency Working Group to
look at a variety of places
where this could be used also including
things like procurement policies.
The reason is social cost of carbon is
important for policy is because
it helps us address
this fundamental trade-off in climate change.
We know that it is expensive to lower emissions.
We're going to have ask car manufacturers to change
their factories so that they can
produce more fuel-efficient cars,
for example, we know that's going to cost some money.
We need to be able to measure how costly that is against
all the benefits that society will
reap by mitigating future climate change,
by lowering the amount of climate change we face.
We're sitting here trying to assess,
it's going to be costly for
those automakers to change our factories,
but we're going to benefit from lower health risks in
the future if we dial back those emissions.
The social cost of carbon is really powerful
because it turns those benefits into dollars,
so policymakers can sit there at the table
and say here are the dollar value of the benefits we
realized by lowering our emission
and we can put that right next
to the dollar value of the cost to lower those emission.
So far we've seen significant progress in
the effort to estimate the social cost of carbon.
However, is this estimate accurate
enough to drastically reduce carbon emissions?
What more should the US government
do to encourage the use of the social cost of
carbon when weighing the costs and benefits
of climate change adaptation and mitigation.
Along with reconsidering the discount rate and
incorporating global damages into the calculation,
finding a better estimate for the social cost of carbon
should include using the latest climate models,
damaged functions and
socioeconomic and emissions projections,
accounting for and valuing
uncertainty and factoring in equity weighting.
With these updates, the social cost of
carbon would have the ability to influence climate policy
and regulated industries across all sectors in a way
that more effectively decarbonizes
the United States economy.
Check out our full length podcast episode with
Tamma Carleton and our episode with Bob Kopp,
where we go into further detail
on how they are working to
create a comprehensive and equitable cost of carbon.
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Thanks and see you next time.