As the Biden administration revives serious discussion of global warming after four years of studies inattention during the Trump administration, the issue of the “social cost of carbon” is at the forefront again. This rather arcane economic concept lies at the heart of determining public policy options for dealing with the impact of a changing climate.
The social cost of carbon (SCC), as a fine article in Wikipedia explains, is the “marginal cost of the impacts caused by emitting one extra ton of greenhouse gas (carbon dioxide equivalent) at any point in time, inclusive of ‘non-market’ impacts on the environment and human health.” The idea behind the SCC is to provide policy makers with ways to justify decisions about how to combat a warming environment, taking into account the costs and benefits of their actions.
SCC has been a contentious issue, both in academic discussions and among the decision makers and the advocates of global warming policies. Advocates of the SCC as a useful policy metric, such as Federal Energy Regulatory Commission Chairman Rich Glick, have argued for its use in determining environmental impacts of natural gas pipeline approvals, while conservatives, such as Robert Murphy of the conservative Institute for Energy Research, argue that it “is utterly flawed.”
Many academic economists side with those who advocate for the use of the SCC, arguing that it is the best way to judge future actions on global warming policies, acknowledging that it must be used carefully.
The discussion about the social cost of carbon was the focus of a recent Resources for the Future online webinar looking at the advent of the Biden administration and what it will mean for U.S. climate policy, and the reentry of the U.S. into the world-wide discussion of climate policy through the Paris accord.
The key to the SCC is a judgement about an economic concept called “social discount rates.” Choosing the discount rate is a driving assumption in determining the social cost of carbon. What are social discount rates? A posting from the Grantham Research Institute on Climate Change and the Environment at the London School of Economics, says, “Social discount rates (SDRs) are used to put a present value on costs and benefits that will occur at a later date. In the context of climate change policymaking, they are considered very important for working out how much today’s society should invest in trying to limit the impacts of climate change in the future. In other words, they calculate how much guarding against future carbon emissions is worth to us now, weighing up the benefits future generations would experience against the costs that today’s society would have to bear.”
Discount rates that decline over time, says the London School explainer, give more weight to future generations, deriving from the observation that “future economic growth is uncertain.”
Discount rates figured prominently in the RFF online seminar. RFF is a venerable Washington-based think tank focused on the connection between environment and economics. In the RFF seminar, Trevor Houser head of the Rhodium Group’s Climate Impact Lab, criticized earlier assumptions that the appropriate discount rate was high, minimizing the value of future policies to reduce carbon emissions. Pushing up long-term costs. He said that “facts on the ground” of the way financial markets have developed has provided “a fairly weak basis for using” a 7%, 5%, or 3% social discount rate in the calculation of the SCC. Since 2003, he said, long-term borrowing costs, a useful gauge of discount rates, have been around 1%. He said there is an “increasingly strong foundation in the market and literature” to revise the central discount rate used widely in federal government benefit, cost ratio calculations, including the impact of global warming.
He added that the Biden administration is also going to look at the costs and benefits of climate policy much more broadly than the Trump administration, which focused only on costs and benefits to the U.S. economy. He said that “reciprocal actions” by governments across the globe impact other nations. This, he said, makes “climate different than many other areas of benefit, cost analysis.”
–Kennedy Maize