What is the social cost of carbon?
Summary
The social cost of carbon (SCC) estimates the monetary damages caused by CO2 emissions, influenced by human activity and political considerations. Diverse estimates exist, but current carbon prices may not reflect the high end of SCC estimates. Investing in sustainable development and responsible investing is therefore essential to mitigate environmental damage and promote ethical investments.
Releasing carbon into the atmosphere damages human health, societies, and the economy. The social cost of carbon (SCC) estimates the monetary value of the total damages caused by each tonne of CO2 released.
It all starts with human activity
Human activities demand energy, which is mostly obtained through the combustion of fossil fuels, releasing CO2 into the atmosphere. This accumulation of greenhouse gases leads to higher global temperatures. The resulting warming causes extreme weather, rising sea levels, and disruptions to ecosystems. In turn, these changes negatively impact human health by increasing respiratory and heat-related illnesses, as well as the spread of infectious diseases. Also, environmental shifts disrupt agriculture, damage infrastructure, displace communities...
The complex task of computing the damages
First, finding the social cost of carbon requires identifying all the damages associated with the temperature rise caused by human activity.
Next, economic values are assigned to these damages, individually. Scientists assess the costs of repairs, healthcare, and any other mitigation measures. These values are then discounted to reflect the time value of money, as the concept of social cost of carbon is a continuous one, over long periods of time. Future costs and benefits are not valued equally to present ones.
The final step of the recipe is to divide this figure by the number of tons of carbon emitted (or projected) - the goal is to derive the cost per ton of CO2 released.
A climate policy tool Politically Charged Issue
Computing the social cost of carbon can be influenced by political considerations. The social cost of carbon is a crucial metric for evaluating the effectiveness of climate policies. It helps determine how much a government should invest today to prevent future expenses associated with the damage caused by a specific amount of CO2 emissions. In essence, it measures the current investment needed to avoid future costs equivalent to the damages caused by X tonnes of CO2.
A politically charged issue
In response to varying political ambitions, researchers may choose different assumptions in their computations to align with their government's climate policies. For example:
- During the Obama administration, the SCC was set at $43 per ton.
- The Trump administration, in its first days in office in 2017, reduced this figure to $3-5 by changing research assumptions.
- On his first day in office, President Biden raised the SCC to $51.
Diverse Academic Estimates
Even among academics, there is significant disagreement on the SCC, depending on the different scientific approaches and assumptions. Some estimates include:
- IPCC : $15 - $220 (2010 PPP level)
- OECD: $147
- World Bank: $160
- Pindyck (Economists): $174
- Rennert et al.: $185
- EPA: $190
- Moore and Diaz: $220
- Alain Quinet, France Stratégie: $250
- Pindyck (Climate Scientists): $316
- Nordhaus: $325
- Ricke et al.: $417
- Wang et al.: $2,387
- Kikstra et al.: $3,000
The current EUA price does not accurately reflect the high estimates of the social cost of carbon. As carbon prices rise, they will increasingly embody the principle that polluters should pay for the environmental damage they cause.
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