Calculating the Correct Social Cost of Carbon
The social cost of carbon (SCC), as a concept, aims to place monetary value on the societal cost of one additional metric ton of carbon released into the atmosphere. Establishing this value, which is much easier said than done, allows for effective, both economic and environmental, policies to be established.
However, there is considerable controversy over how this number should be calculated, what factors should be incorporated, and how to deal with the uncertainties that surround our climate system. This number aims to value future societal impacts: human mortality, agricultural production, migration effects, damage from extreme weather events, and more (Aldy et al., 2021).
The Biden Administration has just recently reintroduced the figures initially calculated by the Obama Working Group after being sidelined during Trump’s term in office. In the last four years, the Trump administration incorporated SCC into their policy decision-making, but the SCC value decided on was nearly one seventh the value that was calculated by the Working Group at a seven percent discount rate. Plainly stated, the discount rate determines how much value we place on the future by discounting future projects back to a current-day basis. The discount rate being relevant in the long term, and climate change being a long-term problem, the importance of the discount rate is clear. The country is now realigned with the Working Group’s original plan, in which the estimated SCC is $51 per ton of carbon dioxide emitted with a 3% discount rate. In other words, for every ton of carbon-emitting into the atmosphere, the government is projecting $51 dollars worth of damages to incur (Jack et al., 2021).
While this improves the US’ climate policy trajectory relative to the one we were on under the Trump Administration, Biden’s administration still severely underestimates the potential damages from climate change. These underestimates come from policymakers avoiding less likely damages and simply accounting for those damages that are most likely. Those who typically make these calculations are economists, who prefer the simpler models, including only the variables that are widely accepted to be the “essential.” The mean, median, most likely values for climate change damages should not be the data points that determine the SCC. In reality, the SCC should be two, three, even fourfold higher than the fifty dollars that we are currently pricing carbon emissions at. The uncertainties of climate damages--tipping points, low probability high impact events, etc.--need to be incorporated in the calculation of this important number. Economists struggle to integrate uncertainties because their monetary values are in question. The lack of certainty surrounding the effects of climate change, and the consequent effects on the economy, produces inefficient results in the eyes of economists; they like working with numbers and information that provides clear answers (Wagner, 2021).
Graphics by Wagner and Weitzman, 2016 show that the most likely outcomes are in fact most likely to happen, but there is a level of uncertainty and possibility for extreme events to take place that is much too high to ignore. These extreme events fall on the tail ends of this curve. The risk of feedback loops, tipping points, etc. taking place places a level of damage on society and the economy that are again far too large to ignore. As Gernot Wagner says, “the real risks are in the tails [of the graphics], the uncertainties.” He alludes to Don Rumsfield, “There are the known unknowns, which are the things that lead us to Iraq, and then there are the unknown unknowns-- the things that we never could have predicted.” In the case of climate change, the known unknowns are the changes that we are knowingly creating and attempting to account for and the unknown unknowns are those extreme effects that are possible from the emissions that we are producing, but we just can’t quite quantify yet; so, we don’t take them seriously (Wagner, 2021).
It’s the tail risk that drives this social costs number much higher than any of the current calculations would suggest. While the current understanding of temperature change and its damages suggests low probability for extreme events, a frightening increase in this probability is evident in the widely accepted projections for CO2 increase in the coming decades (Wagner and Weitzman, 2016).
There is a one in ten chance that the social cost of carbon will be doubled in the event that these tipping points and extreme events do in fact occur. Quantifying and monetizing these damages wrought by climate change prove challenging because of the uncertainty surrounding whether they will actually happen. The uncertainties that we see on the tail ends of these calculations have been then placed on their own graphic, where these new graphs have their own tail ends. Economists and environmentalists are attempting to calculate the value of uncertainties on top of uncertainties. The difficulty of this task is glaring, but one that cannot be ignored.
Yes, a $50 SCC value seems to be a step in the right direction, but who is expressing support towards it? A serious red flag for this number, $50, is waved when one realizes the supporters that it has. Exxon BP, Shell, Chevron, and many fossil fuel energy companies are calling for taxation of their very own companies, their emitted carbon. They support this taxation under the condition that “in exchange, and of course there is always a catch, in exchange for preempting any and all current and future regulations on stationary source pollutants” (Wagner, 2021). Our current SCC value appears attractive to the guiltiest carbon emitting companies. In supporting this number, they imply that our current SCC underestimates the future damages of carbon emissions.
As this number becomes seen more as a vast underestimate, environmental economist teams are working to present the severity of future damages from climate change more accurately. This year, a team came together to develop an integrated assessment model a cost benefit analysis model that is used to calculate the economic, environmental, and social damages of climate change--that would introduce more effective ways to display realistic levels of concern for potential damages. This model is called the GreenDICE model. One of the momentous changes to this model in comparison to the older ones is its incorporation of natural capital as a form of wealth. More specifically, they have begun to incorporate “non-use” values rather than just “use” values. Use values include the value that a man grove provides through its flood protection or, more simply, raw materials used for production of market goods. Non use values, more generally, refers to the acknowledgement of certain species and ecosystems and their ability to produce welfare for future generations. They adopt a new way of valuing natural capital, with more of a focus on the non-use value of nature (Alvera and Moore, 2021).
Results after including the non-use value of natural capital rather than just use value and economic production in the market suggested a SCC that is nearly five times the DICE model calculated, $28. On the other hand, The GreenDICE model suggests a carbon tax of $160. Using this value would reduce emissions to zero by 2050 and reduce warming to 1.5 degrees celsius by 2100 (Alvera and Moore,2021). If this sounds familiar, good. These are the exact goals of the Paris Climate Agreement, which the US has just recently rejoined (United Nations, 2021).
Climate change poses a serious problem not only to the well being of our planet, but also the wellbeing and welfare of the people inhabiting it. As we speed into the future, it is pivotal that policy makers are accounting for all possibilities, especially those with extreme outcomes even if they are not the most likely to happen. The lack of value that is being placed on the future is going to be detrimental to not only the economies that support us but also to the quality of lives that our kids and grandkids are able to have. Policy implemented with input from both economists and avid environmentalists will yield the brightest results for the future. In this case, overestimation will always trump underestimation.