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“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.