New study finds incredibly high carbon pollution costs

social costs of carbon

The costs are especially high for countries like India and the U.S.

New study finds incredibly high carbon pollution costs

By Dana Nuccitelli, CCL Economics Policy Network Team

The social cost of carbon (SCC) is a measure of the economic damages caused (via climate change) by each ton of carbon pollution that we produce today. It is important to CCL because, in the Pigovian Tax framework, it is one of the “external costs” from burning fossil fuels that, if added to their price via a tax (CCL’s policy), would correct market prices by “internalizing the externality” and improve the functioning of the economy. So, the SCC is the level of the carbon tax we know will improve the economy.

It’s difficult to estimate because of physical, economic, and ethical uncertainties. For example, it’s difficult to predict exactly when various climate tipping points will be triggered, how much their damages will cost, and there’s also a question about how much we value the welfare of future generations.

In 2013, the Obama administration set the federal social cost of carbon estimate at $37 per ton of carbon dioxide (up from the previous estimate of $22). That was a conservative estimate—in recent years, research has pegged the value closer to $200 because research has shown that global warming slows economic growth, which makes it quite expensive.

A 2015 study led by Stanford’s Marshall Burke also identified a relationship between regional temperatures and gross domestic product (GDP). Countries whose average temperature is around 13°C (55°F) like the United States have the best economic performance. Economies in countries with colder temperatures, like Canada, Russia, and most in the EU, would directly benefit from a bit of warming.  Economies in countries with hotter climates closer to the equator, like India and many in Africa and South America, would suffer from additional global warming.

social costs of carbon

Global relationship between annual average temperature and change in log GDP per capita during 1960–2010 with 90% confidence interval from Burke et al. (2015), Nature

A new study led by UC San Diego’s Katharine Ricke published in Nature Climate Change built on Burke’s work to estimate the social cost of carbon globally, and also for individual countries. Ricke described her team’s approach in this study as follows:

To calculate social cost of carbon, you need to answer four questions in sequence:

  1. How would the economy change with no climate change (including greenhouse gas emissions)?
  2. How does the Earth system respond to emissions of carbon dioxide?
  3. How does the economy respond to changes in the Earth system?
  4. How should we value losses today vs. in (for example) 100 years?

The team answered these questions using four ‘modules’: a socio-economic module to answer the first question, a climate module to address the second, a damages module to investigate the third, and a discounting module to tackle the fourth.

They concluded that the global social cost of carbon is dramatically higher than the federal estimate—probably between $177 and $805 per ton, most likely $417. And the cost to the U.S. alone is about $40–50 per ton, which is higher than the federal estimate of the global cost of carbon. The cost to the U.S. is particularly high because we’re at that ideal economic temperature, and because as the country with the highest GDP in the world, we have the most to lose. Only India has a higher carbon cost (about $90 per ton) because of its combination of a hot climate, high GDP (6th in the world), and anticipated continued growth leading to large future damages.

social cost of carbon

Estimated country-level social cost of carbon (CSCC) from Ricke et al. (2018), Nature Climate Change

The global cost of carbon is more appropriate than the country-level cost, because our carbon pollution mixes throughout the global atmosphere, and economies are interconnected internationally. However, a significant carbon tax is justified even if we ignore the rest of the world and consider only direct impacts to the U.S. economy, as Burke noted:

Our results suggest that based on pure self-interest, the U.S. should be willing to pay around $40/ton to avoid an emission of CO2. What’s more, the U.S. is very consistently in the top 3 of country-level social costs of carbon – by this metric one of the biggest losers from climate change.

Global SCC or national SCC?

CCL believes strongly that we cannot ignore the climate damage to other countries caused by U.S. emissions any more than we would want them to ignore harm they have done to the U.S. Therefore, we believe the global SCC, estimated here at $417, is the appropriate proxy for the social cost of emissions, and that a carbon tax up to this level corrects market prices and improves the performance of the economy.

However, even if we focus purely on America’s self-interest, we would benefit by reducing the global instability caused by rapid climate change, which for example will increase migration out of poor, hot third world countries that lack the resources to adapt. Nevertheless, some argue that an American carbon tax price should only consider domestic damages ($40–50 per ton), which is lower than the proposed CCL carbon tax trajectory.  

CCL addresses this point by implementing a border carbon adjustment, which imposes a surcharge on imports from countries that do not apply a carbon price equivalent to America’s. This approach incentivizes other countries to implement their own significant carbon taxes to keep the revenue within their own economies, thereby reducing their own carbon pollution. Thus, by implementing a steadily rising carbon tax with a border adjustment, the U.S. would encourage other countries to follow suit, which would significantly decrease global carbon pollution, which in turn would directly reduce the climate damages to the U.S. So for example, if the U.S. enacted policy that incented an equal proportion of emission reductions globally, the value of the reduced emissions to the U.S. alone would be roughly seven times the national SCC estimate of $40-$50 per ton, or $280-$350 per ton (1).  If it incented only half as much emission reductions abroad, the value to the U.S. alone would be $160-$200 per ton.

In conclusion, this new peer-reviewed work indicates that the value of emission reductions is likely over $400 a ton, and the value to the U.S. alone is well over $100 a ton. CCL volunteers can be assured that it clearly supports the notion that the carbon price trajectory in our policy is no more than the SCC and would improve economic performance.

Footnotes:

  1. The U.S. generates about one-seventh of global emissions.  If a U.S. carbon price with a BCA caused emissions to be reduced not just 10% here, but 10% globally, the total value just to the U.S. of the reduced emissions would be 7 times its own SCC of $40-$50.

Dana Nuccitelli is an Environmental Scientist and writes about climate change for The Guardian and Skeptical Science.

The Economics Policy Network is a team of CCL leaders and supporters with a diverse background in the field of climate science. These network contributors write regular guest posts, offering thorough insight into topics that fall within their expertise. Their resources are available in the form of white papers on CCL Community.

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