Environmental Economics. Using and improving the social cost of carbon.

Abstract

SCIENCE sciencemag.org T he social cost of carbon (SCC) is a crucial tool for economic analysis of climate policies. The SCC estimates the dollar value of reduced climate change damages associated with a one-metric-ton reduction in carbon dioxide (CO 2 ) emissions. Although the conceptual basis, challenges, and merits of the SCC are well established, its use in government cost-benefit analysis (CBA) is relatively new. In light of challenges in constructing the SCC, its newness in government regulation, and the importance of updating, we propose an institutional process for regular SCC review and revision when used in government policy-making and suggest how scientists might contribute to improved SCC estimates. Although regulations issued by U.S. federal agencies have been subject to CBA for four decades, those analyses largely ignored economic benefits of carbon reduction until a federal court held in 2008 that carbon emission reductions have nonzero value. After a brief period during which different U.S. agencies used different SCC numbers, an interagency working group established a single set of government-wide values in 2009 and 2010, with an update in 2013 ( 1). Such updates arise because the science, impact estimates, and socioeconomic models used to develop the SCC continue to evolve, as do expert opinions about how it should be synthesized. The results for CBA are consequential (see the graph). Using the most recent central value of interagency SCC estimates, a proposed U.S. rule on emissions from existing power plants would pass a CBA on climate benefits alone ( 2); using the central value SCC from a single agency in 2008 ( 3), it would not. Estimating the SCC in a particular year, say 2015, involves four steps: (i) projecting a future path of global greenhouse gas (GHG) emissions; (ii) translating this emissions path, along with an alternative that adds 1 ton in 2015, into alternate scenarios of climate change; (iii) estimating physical impacts of these climate changes on humans and ecosystems; and (iv) monetizing these impacts and discounting future monetary damages back to 2015. The SCC is the difference in damage valuations with and without the extra ton of CO 2 in 2015. Integrated assessment models [IAMs; e.g., DICE ( 4), FUND ( 5), and PAGE ( 6)], perform all four steps. Underlying step (i) are assumptions about future climate change policies and their effects on GHG emissions and about population, GDP growth, and technology. In step (ii), a simplified representation of the climate system translates emissions to metrics of climate change (e.g., change in global average temperature). Steps (iii) and (iv) require a damage function that relates climate change metrics to climate impacts and to valuations. Valuation of impacts often aggregates and/or extrapolates detailed climate impact studies and relies on population and economic assumptions from step (i) to project the level of human and economic activity exposed to these impacts in the future.

DOI: 10.1126/science.1259774

Cite this paper

@article{Pizer2014EnvironmentalEU, title={Environmental Economics. Using and improving the social cost of carbon.}, author={William A. Pizer and Matthew D. Adler and Joseph E. Aldy and David Anthoff and Maureen L. Cropper and Kenneth Gillingham and Michael Greenstone and B. Charles Murray and Richard G. Newell and Richard G. Richels and Arden Rowell and Stephanie Waldhoff and Jonathan Wiener}, journal={Science}, year={2014}, volume={346 6214}, pages={1189-90} }