Element VI Consulting - Element VI Consulting

The Social Cost of Carbon aka “SCC”

On June 5, a federal government policy wonk collective (the “Interagency Working Group on Social Cost of Carbon”) issued its latest estimate of how much global damage will be inflicted in the future by a marginal ton of CO2 emitted today in the U.S.  The SCC is the Feds’ guess at quantifying the present value of future costs arising from “changes in net agricultural productivity, human health, property damages from increased flood risk, and the value of ecosystem services due to climate change”.  In part, the aim is to illuminate what it is worth spending today to prevent damage tomorrow, so we can expect to see the new SCC turning up in every climate-related government regulation.

The calculation is an important but complex, even semi-philosophical one: it uses 3 different models and a large set of assumptions and judgment calls. The final number also depends critically on the time period for considering future damages, the probabilities assigned to those damages and the discount rate applied to their cost to translate them to today’s dollars. The working group looked out to 2300 AD and used a “central” discount rate of 3% – all very abstract, but one (simplified) example will show the implications. At 1% / year discount rate, the value today of a hypothetical (but for this purpose, 100% certain) event inflicting $1 trillion damage in 300 years’ time, is about $50 billion, or around $10 per ton of US GHG emissions; at a 5% discount rate it is $220,000, or less than 1/100 cent per ton of emissions today. At the chosen 3% rate it comes to about $111 million today, or 2c/ton.

In 2010, the Working Group hit on a central estimate of $21/ton for the overall cost of a ton of CO2 emitted today; now it estimates $33/ton, a 57% increase. As we said, this is a very important number; it is the value used to justify whether the benefits of a federal climate regulation outweighs its costs. So it just became 57% easier for EPA to justify the costs of regulating CO2.

Interestingly, that 57% increase results solely from changes in how the models assess the value of predicted damage, with no changes to the assumptions about either what future emissions will be or how the climate will react to those emissions. Mostly because of the discount rate, it is a pretty conservative number by some international standards. The UK government uses around $80/ ton and the Stern review in 2006 used $85.

This is where the rubber meets the road in terms of the benefits from action on climate change today, and we’d like to see a much wider and more informed public discussion of the subject and its implications.

Categories