SOCIAL COST OF CARBON

THE SOCIAL COST OF CARBON

INTRODUCTION

The social cost of carbon is the damage done by emitting an additional unit of carbon dioxide. It is typically expressed in US dollar per metric tonne of carbon. If the social cost of carbon is evaluated along an emission trajectory that is Pareto optimal, then the social cost of carbon equals the Pigou tax. The social cost of carbon is thus a measure of the seriousness of climate change, and a yardstick against which to judge actual and proposed climate policy.

DISCUSSION

The social cost of carbon in year t is defined as the first partial derivative to carbon dioxide emissions in year t of the net present value of the damage costs of climate change from year t to infinity.

The social cost of carbon therefore depends on a large number of variables, including

1. future development of population and economy;

2. future emissions of greenhouse gas emissions;

3. future climate change;

4. future impacts of climate change;

5. values of these impacts;

6. the rate of pure time preference;

7. the rate of risk aversion; and

8. the rate of inequity aversion.

The social cost of carbon (SCC) is the marginal cost of emitting one extra tonne of carbon (as carbon dioxide) at any point in time. To calculate the SCC, the atmospheric residence time of carbon dioxide must be estimated, along with an estimate of the impacts of climate change. The impact of the extra tonne of carbon dioxide in the atmosphere must then be converted to the equivalent impacts when the tonne of carbon dioxide was emitted. In economics, comparing impacts over time requires a discount rate. This rate determines the weight placed on impacts occurring at different times.

According to economic theory, if SCC estimates were complete and markets perfect, a carbon tax should be set equal to the SCC. Emission permits would also have a value equal to the SCC. In reality, however, markets are not perfect, and SCC estimates are not complete (Yohe et al.., 2007:823).

An amount of CO₂ pollution is measured by the weight (mass) of the pollution. Sometimes this is measured directly as the weight of the carbon dioxide molecules. This is called a tonne of carbon dioxide and is abbreviated "tCO₂". Alternatively, the pollution's weight can be measured by adding up only the weight of the carbon atoms in the pollution, ignoring the oxygen atoms. This is called a tonne of carbon and is abbreviated "tC". Estimates of the dollar cost of carbon dioxide pollution is given per tonne, either carbon, $X/tC, or carbon dioxide, $X/tCO₂. One tC is roughly equivalent to 4 tCO₂. Estimates of the SCC are highly uncertain.The wide range of estimates is explained mostly by underlying uncertainties in the science of climate change (e.g., the climate sensitivity), different choices of discount rate, different valuations of economic and non-economic impacts, treatment of equity, and how potential catastrophic impacts are estimated. Other estimates of the SCC spanned at least three orders of magnitude, from less than $1/tC to over $1,500/tC. The true SCC is expected to increase over time. The rate of increase will very likely be 2 to 4% per year.

The SCC is conceptually different from:

• the market price of carbon, which reflects the value of traded carbon emissions (for example, through the EU Emissions Trading System, EU ETS)
• the marginal abatement cost, which reflects the cost of reducing emissions (rather than the damage if those emissions continue).

CONCLUSION

The Social Cost of Carbon (SCC) measures the full cost of an incremental unit of carbon (or greenhouse gas equivalent) emitted now, calculating the full cost of the damage it imposes over the whole of its time in the atmosphere. It measures the externality that needs to be incorporated into our decisions on policy and investment options.

The SCC matters because it signals what society should, in theory, be willing to pay now to avoid the future damage caused by incremental carbon emissions.