The Social Cost of Carbon: Counting the Costs of Climate Change and the Benefits of Cutting Carbon Pollution

February 26, 2014 | 11:50 am
Rachel Cleetus
Policy Director

Last November the Office of Management and Budget (OMB) solicited comments on the administration’s social cost of carbon (SCC) calculations. Today, as the extended comment period closes, the Union of Concerned Scientists filed joint comments with Environmental Defense Fund (EDF), Institute for Policy Integrity (Policy Integrity), and Natural Resources Defense Council (NRDC) in support of the SCC. The current SCC value is an important start for measuring the benefits of cutting carbon pollution. At $37 per metric ton of CO2 in 2015 (2007 dollars, using a 3% discount rate), it is also almost certainly an underestimate of the costs of climate change and can be improved in the future.

A simple idea: carbon pollution is costly

At its core the social cost of carbon is a pretty simple idea. Carbon pollution, from human activities like burning fossil fuels and cutting down tropical forests, is causing climate change. And the impacts of climate change—including drought, heat waves, and coastal flooding, and resulting public health and economic consequences—are costly for all of us. Yet those so-called social costs aren’t factored into decisions by individuals, companies or governments about how much carbon to emit. So we get what economists call a market failure: too much carbon because the benefits of activities that cause emissions accrue directly to the polluters, while the costs are shifted to global society, now and in the future.

Limiting carbon pollution

How to correct this market failure? Well, the obvious answer to an economist would be to put a price on carbon that reflects its cost to society. Everyone would then have to fully take account of both the costs and the benefits of any of their activities that emit carbon. In fact, some large companies are already factoring a carbon price into their planning and investment decisions.

Unfortunately, Congress has thus far refused to take this most obvious step to address climate change.

But we do have other important policies that can help reduce carbon pollution, including efficiency standards and carbon standards. Government agencies are required to perform a cost-benefit analysis in evaluating these policies, and that’s where the social cost of carbon comes in. It’s defined as the cost (that is, the harm) of an additional ton of CO2 emitted, and therefore can also be used to evaluate the benefits of cutting that ton of CO2. By adding the benefits from all the tons of CO2 saved by a particular policy, one can arrive at a total value for its carbon benefit. For example, Minnesota’s Department of Commerce has recently recommended using the social cost of carbon in evaluating the benefits of a rooftop solar initiative.

Calculating the social cost of carbon

In a previous blogpost I discussed more about what the social cost of carbon is and how the administration calculated it using integrated assessment models that combine insights from climate science and economics. Calculating the SCC is a technically complicated modeling exercise, and also involves ethical considerations like whether and how much to discount costs imposed on future generations. The estimate we have now is grounded in solid but incomplete scientific and economic information—for example, it focuses primarily on the costs that are most easily monetized—and therefore is very likely an underestimate. The SCC can and should be improved as our knowledge of climate impacts and their costs advances, and the improved estimate will almost certainly be higher.

Weighing in with technical comments

As mentioned above, you can read our joint comments here. They focus on the sound analytic and legal basis for using the SCC in regulatory cost-benefit analyses and provide recommendations for future improvements to the SCC.

Some fossil-industry groups will also weigh in. Unfortunately, many of them seem determined to focus on short-term private gains at the expense of long term costs to all of us. Transitioning away from fossil fuels is a necessity if we are serious about addressing climate change and limiting its burden on our kids and grandkids. It may not be easy and it will take some time. Due attention must be paid to the needs of workers and households disproportionately affected by the changes. But the benefits of cutting carbon are clear—and large. Hopefully, fossil industry holdouts will soon take a more serious look at the longer-term picture and stop standing in the way of progress for clean energy solutions.

A more transparent process

The interagency process that was used to arrive at the original and revised SCC estimates was an open one, involving many experts within and outside of government agencies. Nevertheless, the OMB public comment period provides a welcome opportunity for greater transparency and accountability. Let’s move beyond debating whether climate change is costly to what we can do to limit those costs: cut our carbon emissions and build resilience to climate impacts already locked in.