Social Cost of Carbon
Calculating the Cost of Climate Change
The “social cost of carbon” (SCC) estimates the monetary cost to society from the damage caused by each additional metric ton of carbon dioxide (CO2) released into the atmosphere, due to climate change impacts. Under Executive Order 12866, federal agencies must justify proposed regulations by assessing their costs and benefits. Therefore, policymakers use the SCC to evaluate the damage avoided by, or benefits resulting from, regulations that would limit CO2 emissions.
In more simple terms, "It’s sort of like a carbon tax that only applies to government decisions and is never actually paid but still incentivizes long-term good behavior over short-term economic gains."
There is a broad range of SCC estimates due to the many complex factors that go into quantifying climate change’s wide-ranging impacts in the future. Although the Obama administration’s 2013 SCC estimate (updated from the 2010 estimate) has received pushback from some members of Congress, the Government Accountability Office (GAO) recently reviewed the 2013 update and concluded that it was properly and transparently developed. Prompted by the request of critics of the tool, the GAO review found that the development process used consensus-based decision-making, relied on existing academic literature and three separate models developed outside of the government, and took steps to disclose limitations and incorporate public comment and review. Moreover, the SCC was updated in 2013 because the three models that the SCC relies on had been updated by the scientific community’s ongoing peer-review process, not because the federal working group had changed any of the input going into the models. Still, there are many economists who think that the 2013 SCC estimate is too low and ignores many important factors.
Challenges to the SCC
The SCC underpins many of the Obama administration's climate rules, at least 150, from the Clean Power Plan to energy and fuel efficiency standards. In August 2016, a federal court struck down a legal challenge to the SCC when industry groups sued the Department of Energy (DoE) over new refrigeration efficiency regulations, challenging the validity of the social cost of carbon. The Seventh Circuit Court of Appeals upheld the use of the SCC and the regulations based on it. In April 2016, a Minnesota judge rejected an industry argument for lowering the SCC and reaffirmed the science justifying the federal number for use by the state’s Public Utilities Commission.
A memo sent to the DoE by Donald Trump's transition team indicates that the rule may face future challenges under the new administration. The memo asked for the names of employees and contractors who worked on climate policies under President Obama, including those who helped develop the SCC (though the transition team later disavowed the questionnaire). Though it would be legally challenging for the Trump administration to do away with the SCC rule entirely, changes to the underlying assumptions and calculations of the rule could render it useless. Daniel Simmons, vice president for policy at the Koch-linked American Energy Alliance and a member of the Trump transition team, said of the rule, “Once you start to dig into how the numbers are constructed, I cannot fathom how anyone could think it has any basis in reality.”
Trump's "America First Energy Plan," one of the first things to go up on the new White House website on Inauguration Day, does not call out the SCC by name, but says that the US has been "held back by burdensome regulations on our energy industry" and that "President Trump is committed to eliminating harmful and unnecessary policies."
The Range of SCC Estimates
- In 2013, the Obama Administration, in coordination with eleven federal agencies, recalculated the SCC to currently be about $36 per metric ton of carbon, up from their previous 2010 calculation of about $22.
- The original interagency group that calculated the 2010 SCC recommended that the estimates be revisited on a regular basis or as models are updated to reflect scientific and economic advances. This 2013 SCC estimate was therefore prompted by new versions of the three integrated assessment models used by the U.S. government to estimate the SCC (DICE, FUND, and PAGE).
- Economists Frank Ackerman and Elizabeth A. Stanton found in a 2012 paper that the government's previous SCC "omits many of the biggest risks associated with climate change" and could be as high as $900 in 2010 in cases of "high climate sensitivity, high damages, and a low discount rate."
- Economist Chris Hope and researcher Mat Hope published a study in 2013 that found that the relative costs of climate change are higher in a world with slower economic growth. Their model’s average estimate of the cost per ton of carbon dioxide emissions today exceeds $100.
- A 2014 report by The Cost of Carbon Pollution, a joint project of the Environmental Defense Fund, the Institute for Policy Integrity, and the Natural Resources Defense Council, found that the federal 2013 SCC update was far too low because it misses or poorly quantifies 29 key climate impacts, including ocean acidification, rapid sea level rise, and wildfires.
- A 2015 study out of Stanford University, which incorporated the reduced economic growth developing countries experience as a result of climate change, calculated that the social cost of carbon is actually $220 per ton, significantly higer than the current $37 per ton.
How the SCC is Estimated
- The SCC is estimated by economists, using models to take into account engineering, economics and climate science factors.
- Some factors that are incorporated into SCC models include: how rapidly global warming will progress as the atmosphere is filled with greenhouse gases, the severity of the damages that will result from the early and later stages of warming, and unique changes in the climate system such as irreversible tipping points. Economists must also address potential ecological, economic, and social impacts such as whether changing weather will affect species extinction, economic growth, human health, and even social conflict over limited resources.
The “Cost of Inaction” on Climate Change
- The “cost of inaction” is the potential financial cost of the many types of damage related to climate change. Projections show that climate change will have negative impacts on coastal areas, public health, energy and water resources, agriculture, and transportation infrastructure.
- Economists Frank Ackerman and Elizabeth A. Stanton found that if present trends continue, the total cost of climate change will be as high as 3.6 percent of U.S. gross domestic product (GDP) by 2100. Furthermore, they found that the cost of hurricane damage, real estate losses, energy costs, and water costs alone would be approximately 1.8 percent of U.S. GDP by 2100 or almost $1.9 trillion annually.
- According to the IPCC’s 5th Assessment Report, the impacts of climate change on labor productivity could result in output reductions of up to 20% in some sectors during the second half of the century and the global economic cost of reduced productivity could be more than $2 trillion USD.
- At least two dozen extreme weather events in 2015 were directly linked to climate change, and 2016 was the hottest year on record, surpassing 2015, which beat the record set in 2014.