What’s happening? US President Joe Biden has restored the US’ internal estimate of the social cost of CO2 emissions to Obama administration levels of $51 per ton, compared to $8 under the Trump administration. This interim figure will be updated after a comprehensive science-based assessment from an interagency working group, which will produce a final “social cost of carbon” (SCC) by January 2022. (Politico)

What is the social cost of carbon? That’s a good question, and one economists have been debating for decades. Technically it’s the discounted net-present value of the future damage from emitting a tonne of CO2 into the atmosphere. Or, more simply, it’s a monetary estimate of the damage caused by CO2. Bloomberg describes it as “the most important number you’ve never heard of”.

Why does it exist? Integrating the true SCC into economic thinking would mean the “externalities” – or costs that are not recorded on balance sheets – associated with a given amount of CO2 would be adequately accounted for, and properly priced into decision making. Essentially, we wouldn’t be emitting so much CO2 because we would have thought properly about all the damage it will do.

In practice, the SCC is not used adequately (and in many places not at all). The determination of the number hinges on a number variables, including the “discount rate”, which is used to assess the relative weight of future climate change impacts. Use a low discount rate and future climate damage will be valued relatively high, and so this justifies greater action to prevent it. Using a high rate means you care more about the present and less about potential people in the future, and the SCC will be lower.

How is the SCC used? It can be used to inform whether market-influencing policies such as carbon taxes or emissions trading systems are pricing carbon effectively. The Biden administration will use the SCC to inform its decision making and the costs and benefits of certain regulations and infrastructure projects.

What should the SCC be? A recent paper from economists Nicholas Stern and Joseph Stiglitz cautions Biden against setting an ultimate figure lower than $100 per ton. Too low a figure would prevent certain critical emissions reduction projects from going ahead, as their costs would outweigh the estimated future climate benefits.

The Trump administration (perhaps unsurprisingly) used an SCC of $8 (in 2018 dollars). It limited its estimates of climate damage to the US only, completely dismissing the rest of the world, and used a discount rate of 7% – which strongly favours current generations over future ones. Its methodology was found by the US Government Accountability Office to systematically underestimate future CO2 damage.

Ultimately, the SCC in essence comes down to one thing – how much do you value the future?

Further reading:

The social cost of carbon, Carbon Brief