July 27, 2011
What Is the Real Social Cost of Carbon?
by Robert Kropp
A new report from the Economics for Equity and the Environment Network argues that the figures
arrived at by the US government are far too low, and that climate change mitigation is far less
expensive than climate damage.
The economist Frank Ackerman wrote, "The
social cost of carbon (SCC) may be the most important number you've never heard of."
A 2010 study by the
US government's Interagency Working Group on Social Cost of Carbon determined that in 2010, the
economic damage done by one ton of carbon dioxide emissions would be $21. By 2050, the Working
Group estimated, the SCC would rise to $45.
In other words, according to a report
published this month by the Economics for
Equity and the Environment Network (E3), a network of more than 200 economists whose research
supports the protection of the environment, "If a proposed climate policy would cost more than $21
per ton of reductions in carbon dioxide emissions, then, according to this calculation, it's not
However, the report continues, the calculation "omits many of the biggest
risks associated with climate change, and downplays the impact of our current emissions on future
The peer-reviewed report, entitled Climate Risks and Carbon Prices: Revising the Social Cost of Carbon, argues that
the Working Group may have underestimated how rapidly global warming could progress, the severity
of economic damage caused by the early stages of warming, the damages if climate change is not
addressed, and the valuation of future costs and benefits of climate change.
sensitivity, a measurement of the temperature increase if greenhouse gases (GHG) in the earth's
atmosphere were doubled, has been estimated by the Intergovernmental Panel on Climate Change (IPCC) at three degrees
Celsius. While the Working Group did consider higher values of climate sensitivity, it arrived at
its estimation of SCC using the IPCC's finding.
However, the report from E3 states, "There
is a significant risk that it is larger, and we won't know for certain until it is too late to do
anything about it."
Using the Dynamic Integrated Climate Change (DICE) model developed by
William Nordhaus, the Working Group concluded that 1.8 percent of global Gross Domestic Product
(GDP) would be lost if that atmosphere warms by 2.5 degrees Celsius. The E3 report, on the other
hand, cites a study by the economist W. Michael Hanemann and argues that the damage to GDP in the
US could be four times as large.
What happens to global GDP if climate change remains
unchecked? The Working Group estimated that half of GDP could be destroyed if temperatures increase
by 19 degrees Celsius. However, the E3 report contends, the economist Martin Weitzman found this to
be "a drastic understatement of high-temperature damages." According to Weitzman, half of global
GDP could be lost at an increase of six degrees Celsius, and 99% at 12 degrees.
Furthermore, the E3 report continues, a recent study found that at a warming of 12 degrees,
"large parts of the world will, at least once a year, reach temperatures that human beings cannot
Finally, there is the discounting for the future costs and benefits of climate
change, an issue about which economists themselves appear to differ. According to E3, a lower
discount rate emphasizes the importance of the future. The Working Group analyzed SCC using a
constant three percent discount rate. However, as the E3 report points out, the Stern Review on the Economics of Climate Change, published in 2006, "argued for much lower
discount rates, in order to reflect the damage that climate change could do to future generations."
Stern advocated a discount rate of approximately 1.5%.
The conclusions reached by the
authors of the E3 report paint a far direr picture of the consequences of climate change than did
the study by the Working Group. Instead of an estimated SCC of $21 per ton of emissions, the E3
report arrives at a range of estimates from $28 to $893 for 2010. By 2050, the cost may be as high
"In other words," the report concludes, "It is unequivocally less expensive to
reduce greenhouse gas emissions than to suffer climate damages."
"As long as there is a
credible risk that the SCC, or damages from a ton of emissions, could be above the cost of maximum
feasible abatement, then it is worth doing everything we can to reduce emissions," the report adds.
In a Forbes blog post that references the E3 report, Mindy Lubber, president of Ceres, wrote, "Scientists, and now economists, are
telling us that we are long past due for a more honest accounting of the true costs of carbon
dioxide, which is being emitted into the atmosphere largely at zero cost. Our accounting mistake
is wreaking ecological and economic damage across the US and the world."
"Beyond an upward revision of the US government's social cost of carbonówhich will more accurately
capture the benefits of emissions-cutting measures like tighter fuel economy standardsówe must
eventually move to an economy wide price on carbon to spur innovation in clean technologies."