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“The most important number you’ve never heard of.”

April 16th, 2010 · 10 Comments

“The Social Cost of Carbon may be the most important number you’ve never heard of” according to Frank Ackerman and Elizabeth Stanton in a recent publication from the Economics for Equity and the Environment Network.

The Social Cost of Carbon (pdf) analyzes the efforts within the U.S. government to develop a value of the economic impact of CO2 emissions to use in everything from regulation writing to discussions as to carbon legislation. Set the price too high and the economy could take a near-term hit in terms of lost opportunity costs for more sensible investment choices. Set the price too low and, well, the devastating impacts of catastrophic climate chaos could result as the economy under invests in climate mitigation and adaptation. Right now the costs for polluting CO2 is roughly, well exactly: $0 per ton. Watching glaciers melt, species go extinct, and allergy sufferers suffer more clearly shows that figure is too low.

Ackerman and Stanton provide a strikingly searing look at how the work, to date, of the interagency working group has relied on questionable analyses that systematically understate the costs that CO2 emissions cause and will create. The United Kingdom’s latest calculation is that the Social Cost of Carbon is in the range of $41-$124 per ton, with a central case of $83. The US interagency group’s conclusion: a central price of $21. Why might the U.S. figure be a quarter of the UK figure?

Biased research as a starting point: A key supporting document is a self-proclaimed comprehensive review of published research by Richard Tol. This examination looks to 211 SCC estimates which seems an overwhelming number on face value. In fact, more than half (112) were from the review’s author and those weren’t separate analyses but the scenarios/sensitivity analyses to his own studies. “Every version of William Nordhaus’ DICE model is included, despite the fact that the newer versions were created to update and replace the older versions.” Both Tol’s and Nordhaus’ work is biased toward a lower SCC definition. Others’ work wasn’t treated the same, expansive, way. “For example, the Stern Review, which included multiple scenarios and sensitivity analyses, is treated as only generating a single estimate of the SCC in Tol’s meta-analysis.”

Peer Review: “Peer Review” is a serious gate-keeper in the scientific community but sometimes it blocks the gates to valuable work. Not only does the drive a backward looking definition but it can exclude material that went through equivalent (or better) review. The Stern Review’s analysis calculated a 85 per ton SCC for CO2. It was, however, not “peer reviewed” even though it seen a “level of professional review and detailed scrutiny …. both before and after publication far beyond the normal peer review process.”

High discount rates:  The working group worked with two alternate discount rates, 3 and 5 percent. OMB recommends that sensitivity analyses for intergenerational problems use discount rates below 3 percent. The working group went back and added a 2.5 percent discount rate. This is a critical issue: at what price do you discount tomorrow?

Catastrophic risk:  “The administration’s estimates of the social cost of carbon largely omit the risk of castastrophic climate change.”  Don’t worry, it can never get that bad seems to be the assumption — no way, no how.  This is the insurance value issue and the authors highlight a problem with applying cost-benefit analysis to insurance of such high-risk situations.

“Insurance is guaranteed to fail a simple cost-benefit test:  the average value of payments to policyholders must be less than the average value of premiums for any insurance company to remain in business.  … Policy designed from [the perspective of insuring against catastrophic risk] would not be framed in terms of cost-benefit calculations. Rather it would begin with adoption of a safe minimum standard, based on the scientific analysis of potential risks. … The risk of spending “too much” on clean energy pales in comparison with the risk of spending too little and irreversibly destabilizing the earth’s climate.”

Problems with the selected models. The interim SCC analysis asserts that there are only three relevant climate economics models when others exist. And, those three models (their data sets) all have serious problems. For example,

  1. The “PAGE data set assumes that developed countries can and do engage in nearly costless adaptation to most climate damages in the next century.” Sure, don’t worry about sewer and rail systems near coastlines with rising seas, forget about agricultural systems disrupted by weather pattern shifts, forget all that … adaptation will be easy and cheap.
  2. The FUND model work concludes that the early states of global warming will cause a huge reduction in mortality.  Since the near term, due to discounting values, has a higher value than the long-term, the erroneous conclusion of fewer deaths in the coming decades outweighs far greater mortality a century out.
  3. The DICE model “assumes that most people in the world would be willing to pay for a warmer climate. … concludes that the optimal temperature is far above the current global average.”  It seems, one would think, that “most people in the world” would prefer that all glaciers disappear and that the winter Olympics could only be held in the Arctic (or on Antarctica).

When it comes to DICE,

“UC-Berkeley economist Michael Hanemann has used up-to-date information to reestimate each of the economic impacts of climate change in the DIC damage function, concluding that damages in the United States could be four times as large as the estimates implied by the DICE defaults”

In conclusion …

Ackerman and Stanton have laid bare a process that looks more in line with what could be expected from the fossil-fuel industry than what would be expected from a government intent on building a clean-energy economy and acting seriously to mitigate climate change.

The SCC matters.

If the appropriate social cost of CO2 emissions is in the range of $83 per ton, it is hard to see that Congress would legislate this as a cost (via cap & trade; tax; or otherwise) right now.  However, which is likely to spark serious Congressional pricing of carbon: analysis showing a SCC of $83 or a SCC of $21?  Whatever the Administration’s figure, expect that to be the starting negotiation point with Congress.  Through faulty analysis, as Ackerman and Stanton have so clearly shown, the Administration looks to be sacrificing 75% of the value before coming to the negotiating table.

NOTE:  This is an excellent piece of work with only one item which raises concern.

But reducing emissions also carries a cost — including the price of new “green” energy technologies and more efficient appliances, vehicles, and heating and cooling systems …

Well, that is not clear in a full systems-of-systems analysis. Ackerman and Stanton might, even without considering the value of reducing the impacts of catastrophic climate change, have the sign wrong.  The mentioned “costs” are better described as “investments”, which might have “opportunity costs”, but which clearly have benefits.  For a discussion of this, see Nobel Prize Winner’s Must Read … with a significant omission.

Tags: Energy · Global Warming · analysis · cap and trade · carbon dioxide · carbon tax · climate change · climate legislation · environmental · financial policy · government energy policy

10 responses so far ↓

  • 1 Back to basics … principles matter // Apr 29, 2010 at 12:51 pm

    [...] price doesn’t have to start high, it should be building toward a reasonable definition of the social cost of carbon. (Perhaps, today, in the range of $83 per ton of emissions — even starting at $10 today and building up would give serious incentive for industry to be [...]

  • 2 A simple set of thoughts for a carbon fee // Jun 30, 2010 at 9:35 pm

    [...] off, we should recognize that the best analysis of the social price of carbon (SCC) suggests that the ‘right’ fully-burden…. The numbers below start from a perspective that that honest evaluation of carbon’s cost is [...]

  • 3 An abortive “Bike to Work” Day … with many bike to work days // Jun 11, 2011 at 5:40 am

    [...] carbon emissions about 1-2 tons per year: roughly $75-150 at a sensible social cost of carbon [...]

  • 4 Looking at the real cost of a gallon of gas … // Jun 28, 2011 at 4:19 pm

    [...] well, that is a shadow of the implications of, for example, carbon emissions where a reasonable Social Cost of Carbon would represents easily 50 or more cents per gallon not on the price at the pump.  And, how many [...]

  • 5 Where’s the front-page correction? WashPost Fails Math, Fails Ethics, Fails Readers // Mar 10, 2012 at 10:53 am

    [...] socket would lead to 1800 lbs of CO2 emissions over 10 years and the LED about 300. If we take a social cost of carbon low-to-moderate valuation of $50 per ton ($100 might be more reasonable) with an assumption (hope) [...]

  • 6 Is Maryland’s Offshore Wind Energy Discussion Missing a Key Value Stream? // Apr 2, 2012 at 1:52 pm

    [...] renewable power:  A 310 MW project would reduce Co2 emissions by 586,000 tons per year. (At a low Social Cost of Carbon value stream of $40 per ton, that would be over $23 million / year in [...]

  • 7 W/Climate Talks underway, reality: developed world’s fossil foolish subsidies >5x climate finance // Dec 3, 2012 at 8:56 am

    [...] example, if we take a reasonable “Social Cost of Carbon” (SCC) of $80 per ton (even though some analysis puts this figure up to $1000 ton), each and every ton of coal burned [...]

  • 8 Pickpockets at large: Fossil fuel interests bankrupting states // Jan 28, 2013 at 8:34 am

    [...] pay for its waste disposal.  The tax subsidies that DWG discusses below are only a fraction of the Social Cost of Carbon and the other costs that the extraction and burning of coal, oil, and natural gas imposed on all of [...]

  • 9 The Social Cost of Carbon For A Chicken Rescue // Sep 2, 2013 at 12:11 pm

    [...] but what about true costs?  One shorthand, to capture a portion of those costs would be the Social Cost of Carbon (SCC) from the movement of these [...]

  • 10 Has the BLM ever heard of the Social Cost of Carbon? // Dec 2, 2013 at 6:17 pm

    [...] “Social Cost of Carbon” (SCC) is a tool to provide a fiscal accounting for all the damage implications of adding carbon to the atmosphere. The U.S. government has a SCC figure of about $20 per ton, which is radically below what reasonable. Even though a radically low figure, it matters that SCC has made its way into numerous Federal analyses as per this 2010 EPA report (pdf): To date, economic analyses for Federal regulations have used a wide range of values to estimate the benefits associated with reducing carbon dioxide emissions. In the final model year 2011 CAFE rule, the Department of Transportation (DOT) used both a “domestic” SCC value of $2 per ton of CO2 and a “global” SCC value of $33 per ton of CO2 for 2007 emission reductions (in 2007 dollars), increasing both values at 2.4 percent per year. It also included a sensitivity analysis at $80 per ton of CO2. A domestic SCC value is meant to reflect the value of damages in the United States resulting from a unit change in carbon dioxide emissions, while a global SCC value is meant to reflect the value of damages worldwide. [...]

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