UPSC Prelims 2020 Important topics: The social cost of carbon

The social cost of carbon (SCC) has been called “the most important number you’ve never heard of” because it underpins climate regulations in countries including the US and Canada. It’s one way to put a price on CO2 emissions – but the Trump administration may try to amend it.

What is the social cost of carbon?

Scientists expect climate change to have increasingly negative consequences for society, from rising sea levels to more frequent heatwaves. There is broad agreement that initial, modest benefits – for instance, increased yields for some crops in some regions – will be outweighed by costs as temperatures rise.

Even those who see climate change as a relatively minor problem agree that damages will exceed benefits above 1.1C of warming. Moreover, the world is already experiencing record-hot temperatures around 1C above pre-industrial levels. So how much should we be willing to pay to avert future climate damages?

One way to get a handle on this question is through the social cost of carbon (SCC), which tries to add up all the quantifiable costs and benefits of emitting one additional tonne of CO2, in monetary terms. This value can then be used to weigh the benefits of reduced warming against the costs of cutting emissions.

As we will see, estimates of the SCC are highly uncertain. This does not mean the SCC is zero. In fact, there is an argument that this uncertainty actually increases the SCC. This implies that the most rational response would be to mitigate against the risks of warming as a form of climate insurance. To borrow a phrase, the SCC could well be the worst way to value CO2 – except for all the other ways to do it.

Before we move on, a couple of important technical points. First, since CO2 emitted today will persist in the atmosphere for thousands of years, the SCC incorporates future costs, discounted into today’s money. We’ll take a look at discounting, below.

Second, strictly speaking, the SCC is the social cost of CO2, not simply carbon, and it is usually measured in dollars, pounds or euros per metric tonne of CO2. You might see it shortened to SC-CO2, to distinguish it from estimates of the social cost of methane (SC-CH4). We use SCC throughout this article, referring to CO2.

What’s the point of the social cost of carbon?

Climate change is a classic market failure. The costs of emitting CO2 are borne by society at large, whereas the benefits accrue to those burning fossil fuels. In order to correct the market failure – for instance, with a carbon tax – we need to know the social cost of those CO2 emissions.

Moreover, when governments measure the costs and benefits of a policy or investment decision, they need a value for CO2 emissions. If the SCC is high, then the benefits of cutting CO2 are large and costly climate actions will be justified. If the SCC is low, regulations might be more trouble than they’re worth.

If the world acts like a perfect economic model, then the “optimum” amount of climate effort is where the additional costs of cutting further emissions are balanced by the benefits of limiting further warming. Again, if we are uncertain about the optimum level of mitigation, this doesn’t mean the correct answer is “zero”.

Climate damages increase with economic growth, which tends to put more assets at risk and creates wealthier people who are more willing to pay to avoid impacts. This means that IAMs’ assumptions and equations for GDP growth are important, too.

The models calculate how much GDP is cut by climate impacts, but often do not allow damages to alter the rate of GDP growth. This means they could tend to underestimate the severity of economic losses.

Climate impacts are also non-linear, so the impacts of moving from 1.5C to 2C are greater than an increase from 0.5C to 1C. This means that the social cost of carbon will be lower if emissions are tightly controlled, whereas it will be higher if they are not. This complicates the idea that the SCC can be seen as the amount we should be willing to pay to avoid future damages.

How important is climate sensitivity?

Part of the calculation for SCC is a basic calculation of how scientists think the global climate responds to CO2 emissions. This is known as the equilibrium climate sensitivity (ECS) and is defined as how much the temperature rises if we double CO2 above preindustrial levels (from ~280ppm to 560ppm).

In its latest report, the Intergovernmental Panel on Climate Change (IPCC) put the likely value for ECS in the range 1.5-4.5C. (Note this isn’t total expected warming, it’s the warming per doubling of CO2. If emissions stay as high as they are, we’re on course to more than triple the preindustrial concentration by 2100.)

However, the three models used to calculate SCC (see later section) are built around the ECS range from an earlier IPCC report published in 2007. That version had an ever-so-slightly higher likely range for ECS of 2-4.5C, which has led to claims by some climate sceptics that the SCC should be recalculated.

The US National Academies of Science, Engineering and Medicine (NAS) examined just this question, as part of its recent examination of whether the SCC needed an update. The answer was no, since updating the change in ECS “would not significantly improve the estimates”, all other things being equal.

In other words, while scientists agree on the need to refine the value of climate sensitivity, it is not a major source of difference between estimates of SCC. Far bigger influences come from how the models represent the climate system, the expected costs for a given temperature rise and the discount rate.

There is another way to look at climate sensitivity, too. Rather than what the temperature would be once the climate system balances out completely, there is a simpler metric known as the Transient Climate Response (TCR). This is the temperature at the time when we reach a doubling of CO2, assuming an idealised situation where the concentration rises by 1% per year. The TCR doesn’t allow for very slow processes, such as the exchange of heat between the atmosphere and deep ocean.

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