Common (but misguided) critiques of the SCC
There are benefits to carbon dioxide, and some of these benefits, such as potential increases in agricultural yields, are captured in the SCC estimate. These benefits reduce the magnitude of the SCC. Other benefits that are the result of climate change are omitted, including the lower cost of supplying renewable energy from wind and wave sources, the increased availability of oil due to higher temperatures in the Arctic, and fewer transportation delays from snow and ice. However, omitted negative impacts almost certainly overwhelm omitted benefits. 1 As a consequence, $50 should be interpreted as a lower-bound central estimate.
The other benefits from the use of carbon fuels that are unrelated to climate change (such as economic output) are omitted from the SCC, but they are always included in any analysis in which the SCC is used. In a benefit-cost analysis, the cost of regulations, such as the potential loss of output, is always balanced against the benefits of carbon reductions as partially measured by the SCC.
If we adapt to climate change or develop new technologies, then won’t the value of avoiding emissions be zero?
No. Adaptation and technological change are included in the IAMs already, explicitly or implicitly. In fact, DICE and FUND may overestimate the potential for adaptation by assuming high levels of costless adaptation. Additional research on adaptation—particularly the ability of technological change and climate impacts to lower and raise, respectively, the cost of adaptation—is necessary. According to the 2010 IWG Technical Support Document,2 future research may lead to an increase or decrease in future damages. But even under the overly optimistic assumptions about adaptation made by some models, in none of the IAMs is adaptation effective enough to significantly eliminate climate damages.
Absolutely not. Decisionmakers should not throw up their hands because of uncertainty. As the Ninth Circuit has held: “[W]hile the record shows that there is a range of values, the value of carbon emissions reduction is certainly not zero.” 3 On the whole, uncertainty suggests an even higher SCC than estimated.
Uncertainty around climate change generally warrants more stringent climate policy and raises the SCC. Current integrated assessment models (IAMs) used to calculate the SCC show that the net effect of uncertainty about economic damage resulting from climate change, costs of mitigation, future economic development, and many other parameters raises the SCC compared to the case where models simply use our current best guesses of these parameters. 4 Even so, IAMs still underestimate the impact of uncertainty on the SCC by ignoring fundamental features of the climate problem: the irreversibility of climate change, society’s aversion to risk and other social preferences, and many catastrophic impacts. 5 The next generation of numerical models designed to capture these features of the climate problem currently focus on the optimal tax (i.e., the SCC on the optimal emissions path) and require key simplifying assumptions, though existing results indicate that uncertainty leads to an increase in the optimal tax under uncertainty for realistic parameter values. Rather than being a reason not to take action, if anything, uncertainty increases the SCC and should lead to more stringent policies to address climate change.
While the 2016 IWG estimate is the best available SCC figure, it likely represents a lower bound for the costs of climate change because the models that are used to get the estimates leave out several categories of climate damages, which we discussed earlier. Again, damages currently omitted from the models include, but are not limited to, the effects of climate change on fisheries; the effects of increased pest, disease, and fire pressures on agriculture and forests; and the effects of climate-induced migration. Additionally, these models omit the effects of climate change on economic growth and the rise in the future value of environmental services due to increased scarcity. 6
Uncertainty is also no reason to shorten the SCC time horizon. In 2017, NAS issued a report stressing the importance of a longer time horizon for calculating the social cost of greenhouse gases. The report states that, “[ i ]n the context of the socioeconomic, damage, and discounting assumptions, the time horizon needs to be long enough to capture the vast majority of the present value of damages.” The report goes on to note that the length of the time horizon is dependent “on the rate at which undiscounted damages grow over time and on the rate at which they are discounted. Longer time horizons allow for representation and evaluation of longer-run geophysical system dynamics, such as sea level change and the carbon cycle.” In other words, after selecting the appropriate discount rate based on theory and data (in this case, 3% or below), analysts should determine the time horizon necessary to capture all costs and benefits that will have important net present values at the discount rate. Therefore, a 3% or lower discount rate for climate change implies the need for a 300-year horizon to capture all significant values. NAS reviewed the best available, peer-reviewed scientific literature and concluded that the effects of greenhouse gas emissions over a 300-year period are sufficiently well established and reliable as to merit consideration in estimates of the social cost of greenhouse gases. 7
Not really, because he actually wants higher numbers. Robert Pindyck wrote a brief article 8 and released a working paper 9 shortly after the 2013 update to the IWG’s SCC estimates, in which he criticizes the SCC. However, Pindyck actually advocates for an even higher SCC. He says: “My criticism of IAMs should not be taken to imply that because we know so little, nothing should be done about climate change right now, and instead we should wait until we learn more. Quite the contrary.” He goes on to explain that being proactive will benefit society in the longterm. “One can think of a GHG abatement policy as a form of insurance: society would be paying for a guarantee that a low-probability catastrophe will not occur (or is less likely).” 10 Pindyck actually enforces the idea we discussed above, namely that the uncertainty underlying the SCC is no reason to not use the IWG estimates, but rather that decisionmakers who are interested in taking into account the climate effects of particular options should use the SCC as a starting point. In fact, Pindyck’s own best estimate of the SCC is between $80 to $100, and goes up to $200. 11 Many groups cite Pindyck when criticizing the SCC, but fail to mention that his conclusion actually supports a robust accounting of climate damage externalities in decisionmaking.
- Revesz et al. 2014, supra note 76; Omitted Damages, supra note 6. ↩︎
- TSD 2010, supra note, at 30. Also see, Omitted Damages, supra note 6, at 42-43. ↩︎
- Ctr. for Biological Diversity 548 F.3d, supra note 51, at 1200. ↩︎
- Richard S. Tol, Safe policies in an Uncertain Climate: An Application of FUND, 9 Global Envtl. Change 221-232 (1999); Peterson, S. Uncertainty And Economic Analysis of Climate Change: A Survey Of Approaches And Findings, 11 Envtl. Modeling & Assessment 1-17 (2006); TSD 2016, supra note 2. ↩︎
- Robert S. Pindyck, Uncertainty in Environmental Economics, 1 Review of Envtl. Econ. & Pol’y 45-65 (2007); A. Golub et al., Uncertainty in Integrated Assessment Models of Climate Change: Alternative Analytical Approaches, 19 Envtl. Modeling & Assessment 99-109 (2014); D. Lemoine & I. Rudik, Managing Climate Change Under Uncertainty: Recursive Integrated Assessment at an Inflection Point, 9 Ann. Rev. of Res. Econ. 18.1-18.26 (2017). ↩︎
- For a more complete list, see Omitted Damages, supra note 6. ↩︎
- NAS Second Report, supra note 96. ↩︎
- Robert S. Pindyck, Pricing Carbon When We Don’t Know the Right Price, 36 Regulation 43-46 (2013), available here. ↩︎
- Robert Pindyck, Climate Change Policy: What do the Models Tell Us?, (Nat’l Bureau of Econ. Research, Working Paper No. 19244, 2013), available here. ↩︎
- Id, at 16. ↩︎
- Id. ↩︎