June 23, 2021 by Dr. Sibel EKER
“It is the most important figure you’ve never heard of.” said Michael Greenstone, who was a key architect of the concept as the chief economist on the Council of Economic Advisors to President Obama. Social cost of carbon (SCC) is the marginal cost of the impacts caused by emitting one extra ton of CO2. In other words, the social cost of carbon in 2021 is the cost of one extra ton of CO2 emitted today due to the climate damage it creates throughout its lifetime in the atmosphere.
The importance of SCC as a key metric lies in its role in many policy decisions and climate regulations especially in the US. It is used in the economic analysis of several projects such as leasing federal land for coal production or procurement of steel for public infrastructure. In these analyses, SCC stands as a measure of benefit against the project costs if the project is to reduce emissions, or as a measure of cost if the project is expected to emit more.
Historically, the use of SCC in the US federal decision-making was initiated as early as 80’s, but a consolidated approach across various government agencies was adopted under the Obama administration with an Interagency Working Group (IWG) set up in 2009. This IWG announced in 2013 that the price per tonne CO2 emitted in 2020 is around US $50 (in 2020 dollars). Later, the Trump administration reduced the SCC value to US $1-7 by taking the damages only to the US into account and by assuming a high discount rate. Most recently, in late February this year, the Biden administration restored the pre-2017 SCC value, $51/ton, and announced an upcoming update based on the most recent scientific evidence and inputs of various stakeholders.
Social Cost of Carbon in En-ROADS
As the policy fluctuations show, SCC is heavily dependent on future economic impacts and the discount rate used to evaluate the present cost of those future impacts, which are both highly uncertain. Now, you can explore the implications of these assumptions on En-ROADS, better understand how this important metric is calculated, what unmitigated climate change costs and how much we should be willing to pay for it. Below is a short step-by-step guide:
Step 1: Display the Social Cost of Carbon table
To delve into social costs of carbon in En-ROADS, first bring up the new table we added in the graph menu, under the Population and GDP group. This table lists two metrics:
These two metrics are zero in the baseline scenario, because as the footnote reminds, the economic impact of climate change is assumed to be zero. Follow the link to the Economic Impact assumptions to set a non-zero damage function and discount rate.
Step 2: Set the economic impact and discount rate assumptions
The economic impact of climate change, i.e. the overall reduction in global GDP, is highly uncertain. The assumptions made by the IWG in 2013 are often criticized for underestimating the damage, and scientists urge the new administration to reappraise those damage functions and climate risks. Using the economic impact of climate change feature we released earlier this year, you can experiment with different damage functions, that is, the reduction in global GDP with respect to the temperature, and explore their implications for the social cost of carbon.
Another key parameter for the SCC value is the social discount rate, a measure of how we evaluate the impacts on future generations at present time. The IWG of Obama administration calculated SCC for three different social discount rates, 2.5%, 3% and 5%, and the Trump administration chose 7% as the upper bound.
Step 3: Explore different damage scenarios and discount rates
If you would like to replicate the assumptions of the two US administrations, choose the Nordhaus damage function from the preset menu. This option replicates the damage assumption William Nordhaus made in his DICE model, one of the integrated assessment models used by IWG. Set the social discount rate to 3%, and observe that the number you see is very close to the Obama administration’s SCC value. (See the next section for the explanation of the difference.) Pull the social discount rate slider up to 7% to follow Trump administration’s approach, and maybe even reduce the damage estimates further, and see how low the SCC becomes.
You can respond to the call of scientists to use a stronger damage function, such as the Dietz & Stern option in the preset menu. You can also reduce the social discount rate to 2%, as the New York State has done. With these assumptions, the social cost of carbon goes up to above $1400 per ton, meaning that the each ton of CO2 emitted today, for instance by driving from New York to Las Vegas on an average passenger vehicle, costs our world more than $1400. These high costs call for and justify a strong climate action.
How we calculate Social Cost of Carbon in En-ROADS
To calculate SCC in En-ROADS, we adopted the approach followed by the US Interagency Working Group. Their approach involved simulating three integrated assessment models until 2300, since the atmospheric CO2 has a very long lifetime and the economic damages from today’s emissions are observed for centuries. Therefore, even though the normal time horizon of En-ROADS is through 2100, we extend this to 2300. For the post-2100 period in these simulations, we make the same assumptions as IWG on population, GDP per capita growth rate, carbon intensity of GDP, net emissions from land, and non-CO2 greenhouse gas emissions. With these assumptions for the 2100-2300 period, we calculate SCC in the following three steps:
In the figure below, you can see a comparison of the SCC values for 2020 estimated by En-ROADS and the IWG. Using the Nordhaus damage function, which is the closest damage function assumption to those made by IWG, En-ROADS generates higher SCC estimates. The reason for this difference is the population and GDP scenarios of IWG, developed in 2011, for the period through 2100. As the bottom figure shows, En-ROADS baseline trajectories for the population and GDP per capita follow higher values than those of IWG. This leads to a higher global GDP value in En-ROADS, a higher economic damage, hence a higher social cost of carbon.
If you would like to read about the mathematical implementation of social cost of carbon, see the En-ROADS Technical Reference . Take a look at the EN-ROADS simulator now to create your own scenario of economic impacts and climate action. Please get in touch with us if you have questions, comments or ideas.