Calculating the cost of carbon emissions
Now let’s see... droughts, hurricanes, flooding... Photo: JohnKwan/Fotolia
The social cost of carbon – or marginal damage caused by an additional ton of carbon dioxide emissions – has been estimated by a US government working group at US$21 in 2010. This is not a large number. It seems to suggest that we don't need to do much about climate change: if a proposed climate policy would cost more than US$21 per ton of reductions in carbon dioxide emissions, then, according to this calculation, it's not worth doing.
But the government's calculation omits many of the biggest risks associated with climate change, and downplays the impact of our current emissions on future generations. A reanalysis by Frank Ackermann and Elizabeth A. Stanton at the Stockholm Environment Institute (SEI) explores the effects of uncertainty about climate sensitivity, the shape of the damage function, and the discount rate.
Their analysis shows that the social cost of carbon is uncertain across a broad range, and could be much higher than US$21 – according to their worst-case calculations, the social cost of carbon could be almost US$900 in 2010, rising to US$1,500 in 2050. If the damages per ton of carbon dioxide are that high, then almost anything that reduces emissions is worth doing.
The most ambitious scenarios for eliminating carbon dioxide emissions as rapidly as technologically feasible (reaching zero or negative net global emissions by the end of this century) require spending of up to US$150-500 per ton of reductions in carbon dioxide emissions by 2050.
They conclude, therefore, that when using a reasonable set of alternative assumptions, the damages from a ton of carbon dioxide emissions in 2050 could exceed the cost of reducing emissions at the maximum technically feasible rate. Once this is the case, the exact value of the social cost of carbon loses importance – the clear policy prescription is to reduce emissions as rapidly as possible, and cost-effectiveness analysis offers better insights for climate policy than cost-benefit analysis.
Climate risks and carbon prices: Revising the social cost of carbon. July 2011. By Frank Ackerman and Elizabeth A. Stanton, SEI. Published by Economics for Equity and the Environment network. Available at: http://www.sei-us.org/publications/id/399