An Obama administration task force has recently proposed that $21 per ton is an appropriate “social cost of carbon.” (The social cost of carbon, or SCC, is an estimate of the damage caused – both today and in the future – by the release of an additional ton of carbon dioxide into the atmosphere; it’s a topic that I’ve discussed frequently in this blog (see here, here, and here). A bigger SCC means that the federal government is willing to do more to more to slow greenhouse gas emissions; conversely, a smaller SCC means that fewer emissions abatement measures will be considered “economical.”) In an Economics for Equity & Environment white paper, released today, Frank Ackerman and I discuss the very serious errors and omissions that have led to EPA, OMB and other agencies’ promotion of what is a very low SCC.
As our paper demonstrates, the calculation of the SCC is less science than alchemy. It is also – like much of cost-benefit analysis – a very strange way of making decisions. Cost-benefit analysis sounds like common sense: weigh the costs of an action against the benefits. A good policy will have net benefits; a bad policy, net costs. Simple.
Well, actually, no, not so simple. There are (at least) three big problems:
Problem #1: When it comes to the greenhouse gas emissions (and many other environmental issues) we can’t measure the costs and benefits with any accuracy. We’ve never filled the atmosphere with CO2 before. We’ve never tried to remove large quantities of CO2 from the atmosphere before. Some of the important consequences of climate change, such as the loss of human lives and risks of extinction of endangered species, simply don’t have meaningful prices (although economists have at times made up dollar values for them). And many of the costs of halting emissions and benefits of averting damages will occur well into the future. That’s a lot of uncertainty, which doesn’t tend to increase the accuracy of economic predictions.
Problem #2: Many of the costs and benefits will affect not us, but our great-grandchildren, and there is a fair amount of disagreement (a least among economists) about how to weigh these future impacts in the decisions we make today. Some (like me) say we should weigh all damages equally regardless of whether it is us or our descendants that suffer the costs. Others feel that future costs (and benefits) are worth far less than those that take place today.
Problem #3: While climate policy will benefit humanity as a whole, the costs of reducing emissions and the benefits of avoiding a climate catastrophe will impact different people differently. Most people will be net gainers from climate policy (more benefits than costs), but some will be net losers (more costs than benefits). This is true both across generations – future generations are the biggest net gainers from climate policy – and among the Earth’s population today. As a broad generalization, poorer people have more to gain from climate policy. The more one weighs the interests of the net losers compared with the net gainers, then, the less one will conclude that we should do to avert climate change.
In short, cost-benefit analysis is complicated, and its results are open to a lot of interpretation. Regrettably, that is how the U.S. government makes decisions about environmental issues. In a cost-benefit analysis of emission reducing policies, the social cost of carbon is the benefit from each one-ton reduction in carbon emissions (it’s the damage that doesn’t happen, and thus, a benefit). A bigger SCC means a bigger benefit from reducing emissions, making it more likely that any particular carbon reduction policy will pass muster as delivering greater benefits than costs.
There is no way to truly measure the SCC. (Seriously, all climate damages throughout time reduced to one figure in today’s dollars? If you really have faith in such a figure, I have a bridge in Brooklyn that I’d like to sell you.) The Obama administration should consider looking at the problem of emissions abatement from an entirely different angle: For example, by how much do we need or want to reduce U.S. emissions, and what’s the cheapest way to do that? Alternatively, how much can we afford to devote to insuring ourselves against the danger of catastrophic climate change? Decisions made from starting points like these are far more likely than cost-benefit analysis to result in a climate policy that is both effective and economical.