Passage of the long-awaited U.S. Senate climate and energy bill released weeks ago would finally put a national price on carbon. Now lawmakers are working to pin down another price to ensure that coming regulations actually reduce emissions: the "social cost of carbon."
The social cost of carbon is an economic analysis that weighs the cost of cutting back on climate-warming carbon dioxide against the benefits. In practice, the calculation applies a price on each ton of CO2 released based on its future harm to humans. As Washington tries to incorporate climate change into rules and regulations across the government, this elusive price is expected to influence many energy and environmental policy decisions to come.
The government’s first attempt at setting a social cost, however, is deeply flawed, according to a new report by the Economics for Equity and the Environment Network (E3), a nationwide group of economists focused on environmental policy.
According to the report authors, an opaque and mathematically questionable process led a collection of U.S. government agencies to assign a social cost of carbon estimate of $21 per ton in 2010 — equivalent to about 20 cents per gallon of gasoline.
That price, the authors say, is "far too small a price incentive to prompt substantive mitigation measures."
"If widely adopted," the report says, "this low estimate of the SCC could result in ineffectual regulations that would barely reduce U.S. emissions, if at all."
The Government’s Questionable Process
The government’s calculations were done by the Interagency Working Group on Social Cost of Carbon, a group that includes the White House Council on Environmental Quality, the Department of Agriculture, the Environmental Protection Agency (EPA) and a number of other government bodies.
According to Frank Ackerman, one of the report’s authors and the director of the Climate Economics Group at the Stockholm Environment Institute’s Boston-based U.S Center, the government estimate was tacked on as an appendix on an obscure document, and the working group did not include any specific author names or contact information.
"It is now taken as representing U.S. government policy, but it is apparently a policy that nobody really wanted to have an individual name on," Ackerman said in a webinar on his research on Monday.
He added that the three economics models used to arrive at $21 per ton all have substantial flaws. Among them are underestimates of potential damages associated with modest amounts of warming, as well as negative effects that climate change is predicted to have on human health.
"The estimates depend very much on what we think the damages will be as temperature rises," Ackerman said, noting that most scientists think keeping the world below two degrees Celsius of warming is crucial to avoid some of the most catastrophic effects of climate change.
"These models have a very different view…[They] suggest that two degrees is not really a big deal."
For comparison, government estimates of the social cost of carbon in the United Kingdom range from $41 to $124 per ton of CO2, with a "central case" of $83 per ton. Other estimates that economists or lawmakers have made range from the single digits into the thousands of dollars.
Discount Rates and Equity Weighting
Among the problems with the U.S. government analysis is the use of what is known as a discount rate, or the depreciation of money over time. In terms of climate economics, that rate asks a vital question: If warming causes $100 in damages 50 or 100 years from now, how much money is needed today in order to cover those future costs?
In the government’s analysis, the short answer is not a lot. The analysis uses a relatively high discount rate of between 2.5 percent and 5 percent per year. In an extreme case, spending only around five dollars today would cover $100 worth of environmental harm decades down the road, according to its calculation.
The E3 authors claim that in setting a such a high discount rate, the government is making an ethical judgment that current economic wealth is more important than that of future generations. A lower rate, they argue, may demand a higher price of action up front but would better protect the planet in the future.
For Laurie Johnson, chief economist at the climate center of the Natural Resources Defense Council, another problem with the government’s social cost estimate is the lack of "equity weighting," a cost factor that acknowledges that poorer nations are more vulnerable to the ravages of climate change.
"A disproportionate share of the burden is going to be experienced by poor countries," Johnson said. "To say a dollar’s worth of damage is equivalent between rich and poor, that’s something that could really be quite embarrassing."
Worst-Case Scenarios Left Out
The case for taking immediate global action to shrink emissions and stabilize the climate rests in part on the relatively slim possibility of a warming-induced catastrophe.
Scientists tend to publish ranges for temperature change and sea level rise that are often on the conservative side. But the extreme ends of the spectrum — say, a worst-case scenario with a five percent chance of occurrence — would be so damaging to the world that taking out an insurance policy today would be more than worth it, they often argue.
In the government’s social cost of carbon estimate, lawmakers largely ignore this possibility of extreme risk.
"People buy insurance against relatively rare events," Ackerman said. "You have much more than 95 percent confidence that you won’t need your [fire and life] insurance next year. People are insuring against events with probabilities in the tenths of a percent per year. And if you say what are the climate outcomes that look that probable, you get a much, much worse picture than anything in this world of [economic] models."
How Do You Put a Price on the Priceless?
Arriving at a social cost of carbon that could actually lead us toward less warming would take substantive changes to the calculation methods. And according to Peter Dorman, an economist at Evergreen State College in Olympia, Washington, there are some cost factors that may simply be impossible to calculate properly.
The amount of damage to coastal buildings from rising seas is probably a quantifiable number. But how do you put a price on the cultural value of an old coastal community from which villagers are forced to flee — a phenomenon already underway in Alaska. Likewise, how do you determine the monetary value of a few thousand extinct animal species if the planet continues to warm?
Incorporating both calculable warming costs and unmeasurable cultural losses into a single social carbon cost calculation is likely to cause problems.
"The sum of a well-measured number and a poorly measured number is a poorly measured number," Dorman said.
Still, the uncertainties involved in climate accounting are no excuse to underestimate the possibility of environmental catastrophe, said Ackerman.
"Worst case risks can’t be ignored," Ackerman said. "This is an experiment we only get to do once, and worst cases could happen. Are they unlikely as the collapse of a modern oil rig? It’s a different question than it seemed like it was just a few months ago."
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