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It is well known that carbon emissions have an adverse effect on the environment. However, an overlooked area is the effect that this has on the economy. The social cost of carbon is used to determine the value of these effects and what that means for policy.
What is it?
The social cost of carbon (SCC) is an essential tool to help understand and implement climate change policies (Nordhaus, 2017). Put simply, it refers to the economic cost caused by an additional tonne of carbon dioxide emissions (Nordhaus, 2017). The issue is that these emissions do not disappear. They linger for decades, warming the earth - causing economic disruption, health problems and productivity issues. The SCC quantifies that damage for use in policymaking decisions (Burke & Goulder, 2021).
Calculation and Estimation
The SCC only includes things we can measure, such as areas of the economy that we have good data on, like human health and labour productivity (Burke & Goulder, 2021).
SCC estimates vary across sources as many assumptions are made in calculation. For example, two models may value the same outcome differently as it can be difficult to reach an ‘agreed-upon’ price for some social goods like human health. Furthermore, some SCC estimates are country-specific while others are global. Finally, the discount rate which is used can significantly alter the SCC estimate as the calculation spans many decades (Asdourian & Wessel, 2023).
To see an example of this variation, we can turn to the USA. Today, the Biden administration estimates the SCC to be $51 USD per tonne (Davenport, 2023). Whereas, an estimate published in Nature by a group of leading experts estimated that it is $185 USD per tonne (Rennert et al., 2022).
Interpretation Tip!
A SCC of $43 per tonne implies that the expected total damages from one extra tonne of carbon emissions are equal to $43 (Asdourian & Wessel, 2023).
What can this be used for?
Policymakers can use the SCC to help guide their decisions (Asdourian & Wessel, 2023). Essentially, it is a measure used to help with the cost-benefit analysis of policy. For example, for policies which decrease emissions (pictured on the right), the expected decrease in emissions multiplied by the SCC results in an estimate of the benefit of the policy due to the reduction in emissions. The same logic can be applied to a policy which increases emissions (pictured on the left), this time the result being the cost of that policy due to the increase in emissions.
What are some of the issues when placing a price on carbon emissions?
To answer this question, we should turn to lower-income groups. If a policy ends up increasing the price of fossil fuels, there is a ripple effect. The price of goods and services that generate carbon emissions, like home heating or transportation, will also increase.
The issue is that for low-income earners these essentials take up a larger proportion of their income than richer householders (who can also more easily upgrade their appliances to use renewable energy instead of fossil fuels), so their cost of living will be relatively higher (Burke & Goulder, 2021).
To overcome this, policy can be designed to help low-income earners. For example, there could be subsidies provided for goods which use renewable energy to remove some barriers for low-income earners. Furthermore, some of the revenues earned from increased fossil fuel pricing could be redistributed by the government to these groups (Burke & Goulder, 2021).
References
Asdourian, E., & Wessel, D. (2023, March 14). What is the social cost of carbon? Brookings. https://www.brookings.edu/articles/what-is-the-social-cost-of-carbon/#:~:text=The%20social%20cost%20of%20carbon%20(SCC)%20is%20an%20estimate%20of
Burke, M., & Goulder, L. (2021, June 7). Professors explain the social cost of carbon. News.stanford.edu. https://news.stanford.edu/stories/2021/06/professors-explain-social-cost-carbon
Davenport, C. (2023, December 2). Biden Administration Unleashes Powerful Regulatory Tool Aimed at Climate. The New York Times. https://www.nytimes.com/2023/12/02/climate/biden-social-cost-carbon-climate-change.html
Nordhaus, W. D. (2017). Revisiting the social cost of carbon. Proceedings of the National Academy of Sciences, 114(7), 1518–1523. https://doi.org/10.1073/pnas.1609244114
Rennert, K., Errickson, F., Prest, B. C., Rennels, L., Newell, R. G., Pizer, W., Kingdon, C., Wingenroth, J., Cooke, R., Parthum, B., Smith, D., Cromar, K., Diaz, D., Moore, F. C., Müller, U. K., Plevin, R. J., Raftery, A. E., Ševčíková, H., Sheets, H., & Stock, J. H. (2022). Comprehensive Evidence Implies a Higher Social Cost of CO2. Nature, 610. https://doi.org/10.1038/s41586-022-05224-9
Rennert, K., & Kingdon, C. (2019, August 1). Social Cost of Carbon 101. Resources for the Future. https://www.rff.org/publications/explainers/social-cost-carbon-101/
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