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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 worth doing."

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 generations."

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.

Climate 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 survive."

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 as $1,550.

"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."

Lubber continued, "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."


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