Scientists predict that climate change will have, and in some cases has already had, severe consequences for society, like the spread of disease, decreased food security, and coastal destruction. These damages from emitting greenhouse gases are not reflected in the price of fossil fuels, creating what economists call “externalities.” The social cost of carbon (SCC) is a metric designed to quantify and monetize climate damages, representing the net economic cost of carbon dioxide emissions. Simply, the SCC is a monetary estimate of the damage done by each ton of carbon dioxide that is released into the air. The SCC can be used to evaluate policies and guide decisions that affect greenhouse gas emissions.
At the federal level, the SCC has been used by numerous agencies for regulatory impact analysis and in environmental impact statements; however, the SCC can also be used across a range of other areas, including electricity ratemaking, resource management policy and royalty setting, setting emissions caps, and establishing a carbon price. States should use the SCC in a number of different contexts to aid in making rational policy decisions in a transparent manner. Many states are already using the SCC in their decisionmaking.
The best estimates of the SCC for states to draw from are currently the 2016 estimates from the federal government’s Interagency Working Group on the Social Cost of Greenhouse Gases (IWG), despite the fact that this group was recently disbanded. The 2016 IWG estimates are based on the most up-to-date science and economics and were arrived at through an academically rigorous, transparent, and peer-reviewed process. The National Academies of Science, Engineering and Medicine (NAS) conducted a thorough review of the IWG estimates in 2016, and a group of scholars at the nongovernmental organization Resources for the Future has begun a project to update the SCC based on the NAS recommendations.
State decisionmakers can benefit from an understanding of several issues related to the SCC, including discount rates, the role of timing, and the global nature of the IWG estimate. States should also know that the IWG calculated estimates for the social cost of methane and the social cost of nitrous oxide, which are more precise quantifications of the social costs of emissions of those greenhouse gases than simply multiplying the SCC by the global warming potential of those gases, and can be used in all of the scenarios where the SCC can be used.
There are many misguided critiques of the SCC made by those who would prefer less regulation of greenhouse gases, but this should not deter decisionmakers from using the SCC. In fact, there are a wide range of resources that decisionmakers can use while exploring how and why to use 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.
- Revesz et al. 2014, supra note 76; Omitted Damages, supra note 6. ↩︎