tag:theconversation.com,2011:/au/topics/social-cost-of-carbon-14473/articlessocial cost of carbon – The Conversation2023-10-03T12:31:31Ztag:theconversation.com,2011:article/2145492023-10-03T12:31:31Z2023-10-03T12:31:31ZClimate change is about to play a big role in government purchases – with vast implications for the US economy<figure><img src="https://images.theconversation.com/files/551043/original/file-20230928-21-6jlfb6.jpg?ixlib=rb-1.1.0&rect=0%2C31%2C4190%2C2841&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The U.S. government is the single largest buyer of services and goods, like vehicles. That has an impact on the economy.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/postal-trucks-are-parked-at-a-united-states-postal-service-news-photo/1210107059">Saul Loeb/AFP via Getty Images</a></span></figcaption></figure><p>Each year, the federal government purchases <a href="https://www.nytimes.com/2021/12/08/climate/biden-government-carbon-neutral.html">about 50,000</a> new vehicles. Until recently, almost all of them ran on diesel or gasoline, contributing to U.S. demand for fossil fuels and encouraging automakers to continue focusing on fossil-fueled vehicles.</p>
<p>That’s starting to change, and a new directive that the Biden Administration quietly issued in September 2023 will accelerate the shift. </p>
<p>The administration <a href="https://www.whitehouse.gov/briefing-room/statements-releases/2023/09/21/fact-sheet-biden-harris-administration-announces-new-actions-to-reduce-greenhouse-gas-emissions-and-combat-the-climate-crisis/">directed U.S. agencies</a> to begin considering the social cost of greenhouse gases when making purchase decisions and implementing their budgets.</p>
<p>That one move has vast implications that go far beyond vehicles. It could affect decisions across the government on everything from agriculture grants to fossil fuel drilling on public lands to construction projects. Ultimately, it could shift demand enough to change what industries produce, not just for the government but for the entire country.</p>
<h2>What’s the social cost of greenhouse gas?</h2>
<p>The social cost of greenhouse gases represents the damage created by emitting 1 metric ton of carbon dioxide, methane and other greenhouse gases into the atmosphere. </p>
<p>These <a href="https://climate.nasa.gov/causes/">greenhouse gases</a>, largely from fossil fuels, trap heat in the atmosphere, <a href="https://scied.ucar.edu/learning-zone/how-climate-works/greenhouse-effect">warming the planet and fueling climate change</a>. The result is <a href="https://theconversation.com/as-extreme-downpours-trigger-flooding-around-the-world-scientists-take-a-closer-look-at-global-warmings-role-213724">worsening storms</a>, <a href="https://theconversation.com/summer-2023-was-the-hottest-on-record-yes-its-climate-change-but-dont-call-it-the-new-normal-213021">heat waves, droughts and other disasters</a> that harm humans, infrastructure and economies around the world. The estimate is intended to include changes in agricultural productivity, human health, property damage from increased flood risk, and the value of ecosystem services.</p>
<p>By directing agencies to consider those costs when making purchases and implementing budgets, the administration is making it more likely that agencies will purchase products and make investments that are more energy efficient and less likely to fuel climate change.</p>
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<img alt="Solar panels outside a military airplane hangar." src="https://images.theconversation.com/files/550835/original/file-20230928-28-pxs7gt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/550835/original/file-20230928-28-pxs7gt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/550835/original/file-20230928-28-pxs7gt.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/550835/original/file-20230928-28-pxs7gt.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/550835/original/file-20230928-28-pxs7gt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/550835/original/file-20230928-28-pxs7gt.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/550835/original/file-20230928-28-pxs7gt.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">The Department of Defense has been taking steps to reduce emissions for several years. Many of its military bases have solar panels, which can produce renewable energy for a few buildings or larger installations.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/usnavy/7643438142">U.S. Navy</a></span>
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<p>While only a fraction of the <a href="https://www.cbo.gov/publication/58888">roughly $6 trillion</a> that the U.S. government spends each year would likely be considered under the new directive, that fraction could have far-reaching impacts on the U.S. economy by reducing demand for fossil fuels and lowering emissions across sectors.</p>
<h2>Estimating the cost</h2>
<p>The Obama administration introduced the <a href="https://obamawhitehouse.archives.gov/sites/default/files/omb/inforeg/for-agencies/Social-Cost-of-Carbon-for-RIA.pdf">first federal social cost of carbon</a> to incorporate climate risk in regulatory decisions. It’s calculated using models of the global economy and climate and weighs the value of spending money today for future benefits. </p>
<p>When the Trump administration arrived, it cut the estimated cost from around $50 per metric ton to less than $5, which justified rolling back several environmental regulations, including <a href="https://www.epa.gov/sites/default/files/2018-08/documents/utilities_ria_proposed_ace_2018-08.pdf">on power plant emissions</a> and <a href="https://www.epa.gov/regulations-emissions-vehicles-and-engines/safer-affordable-fuel-efficient-safe-vehicles-proposed">fuel efficiency</a>. The Biden administration restored an <a href="https://www.reuters.com/markets/commodities/biden-social-cost-carbon-climate-risk-measure-upheld-by-us-appeals-court-2022-10-21/">interim price to about $51</a>, with plans to raise it.</p>
<p>Recent research suggests that the actual social cost of carbon is closer to <a href="https://doi.org/10.1038/s41586-022-05224-9">$185 per metric ton</a>. But carbon dioxide is just one greenhouse gas. The new directive takes other greenhouse gases into consideration, too – in particular, methane, which has <a href="https://energy.ec.europa.eu/topics/oil-gas-and-coal/methane-emissions_en">about 80 times</a> the warming power of carbon dioxide over 20 years.</p>
<p>Estimates of the social cost of methane, which comes from livestock and leaks from pipelines and other natural gas equipment, range from <a href="https://doi.org/10.1038/s41586-021-03386-6">$933 per metric ton</a> to <a href="https://doi.org/10.1007/s10584-023-03540-1">$4,000 per metric ton</a>. </p>
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<img alt="Photo of a rusted oil pump in an overgrown field in Texas. Rusted parts are piled beside it." src="https://images.theconversation.com/files/551042/original/file-20230928-19-zdojmw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/551042/original/file-20230928-19-zdojmw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=447&fit=crop&dpr=1 600w, https://images.theconversation.com/files/551042/original/file-20230928-19-zdojmw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=447&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/551042/original/file-20230928-19-zdojmw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=447&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/551042/original/file-20230928-19-zdojmw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=562&fit=crop&dpr=1 754w, https://images.theconversation.com/files/551042/original/file-20230928-19-zdojmw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=562&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/551042/original/file-20230928-19-zdojmw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=562&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Oil and gas wells and pipelines are a common source of methane emissions, including what the Environmental Protection Agency estimates to be more than 3 million abandoned wells across the U.S.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/Oil-PluggingWellsandBudgets/727e464e95754337a2346d9be981fcc3/photo">AP Photo/Eric Gay</a></span>
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<p>Without directives like these, decision-makers implicitly set the cost of greenhouse gas emissions to zero in their benefit-cost analyses. The new directives allow agencies to instead compare the expected climate damages, in dollars, when making decisions about vehicle purchases, building infrastructure and permitting, among other choices.</p>
<h2>The vehicle fleet as an example</h2>
<p>The federal vehicle fleet is a good example of how the social costs of greenhouse gases add up.</p>
<p>Let’s compare the costs of driving an electric Ford Focus and an equivalent conventional-fuel Ford Focus. </p>
<p>Assume each vehicle drives an average of 10,000 miles (about 16,000 kilometers) per year – that’s <a href="https://www.fhwa.dot.gov/ohim/onh00/bar8.htm">less than the U.S. average</a> per driver, but it’s a simple number to work with. The damages from emissions in dollars from driving a conventional Ford Focus 10,000 miles are between <a href="https://cdn.theconversation.com/static_files/files/2851/SCC_EV_Spreadsheet.pdf?1696282257">$133 and $484</a>, depending on whether you use a social cost of carbon <a href="https://www.reuters.com/markets/commodities/biden-social-cost-carbon-climate-risk-measure-upheld-by-us-appeals-court-2022-10-21/">of $51 per metric ton</a> or <a href="https://doi.org/10.1038/s41586-022-05224-9">$185 per metric ton</a>.</p>
<p>The climate harm from driving an equivalent electric Ford Focus 10,000 miles, based on the average carbon dioxide emissions intensity from the U.S. electricity grid, would be between $59 and $212, using the same social costs.</p>
<p>Scale that to 50,000 new vehicle purchases, and that’s a cost difference of about $4 million to $13.5 million per year for emissions from operating the vehicles. While producing an EV’s battery <a href="https://www.iea.org/data-and-statistics/charts/comparative-life-cycle-greenhouse-gas-emissions-of-a-mid-size-bev-and-ice-vehicle">adds to the vehicle’s emissions up front</a>, that’s <a href="https://www.reuters.com/business/autos-transportation/when-do-electric-vehicles-become-cleaner-than-gasoline-cars-2021-06-29/">soon outweighed</a> by operational savings. These are real savings to society.</p>
<p>The U.S. government is also a major consumer of energy. If agencies begin to consider the climate damages associated with fossil energy consumption, they will <a href="https://www.eia.gov/todayinenergy/detail.php?id=40192#:%7E:text=The%20U.S.%20federal%20government%20consumed,less%20than%20a%20decade%20before.">likely trend toward renewable energy</a>, further lowering their own emissions while boosting the burgeoning industry.</p>
<h2>How the government can shift demand</h2>
<p>These types of comparisons under the new directive could help shift purchases toward a wide range of less carbon-intensive products.</p>
<p>Much of the U.S. government’s spending goes toward carbon-intensive goods and services, such as transportation and infrastructure development. Directing agencies to consider and compare the social cost of purchases in each of these sectors will send similar signals to different segments of the market: The demand for less carbon-intensive goods is rising.</p>
<p>Because this new directive expands to other greenhouse gases, it could have broad implications for new <a href="https://www.reuters.com/markets/commodities/biden-social-cost-carbon-climate-risk-measure-upheld-by-us-appeals-court-2022-10-21/">permitting for oil and gas</a> development and agricultural production, as these are the two largest sources of methane in the U.S.</p>
<p>While this decision is not a tax on carbon or a subsidy for less carbon-intensive goods, it will likely send similar market signals. With respect to purchases, this policy is akin to tax rebates for energy efficient products, like electric vehicle incentives in the Inflation Reduction Act, which boost demand for EVs.</p>
<p>Ultimately, if <a href="https://sciencebasedtargets.org/news/us-government-the-worlds-largest-purchaser-takes-a-bold-step-to-align-supply-chain-with-sbti">one of the largest segments of demand</a>, the U.S. government, transitions to less carbon-intensive products, supply will follow.</p><img src="https://counter.theconversation.com/content/214549/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jesse Burkhardt receives funding from the USDA and Department of the Interior. </span></em></p><p class="fine-print"><em><span>Lauren Gifford does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Biden administration directed agencies to consider the cost of greenhouse gas emissions in their future purchasing and budget decisions. An example shows just how much is at stake.Jesse Burkhardt, Associate Professor of Energy Economics, Colorado State UniversityLauren Gifford, Associate Director of the Soil Carbon Solutions Center, Colorado State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1900502022-09-08T06:00:19Z2022-09-08T06:00:19ZAustralia finally has new climate laws. Now, let’s properly consider the astounding social cost of carbon<p>The federal government’s climate change bill <a href="https://www.pm.gov.au/media/australia-legislates-emissions-reduction-targets">passed the Senate</a> on Thursday. Among the mandates in the new <a href="https://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r6885">Climate Change Act</a> are assessments of the social, employment and economic benefits of climate change policies. </p>
<p>These assessments will be included in annual statements, prepared by the government with input from the Climate Change Authority. </p>
<p>A <a href="https://doi.org/10.1016/S2542-5196(22)00196-6">letter</a> we published today in The Lancet Planetary Health outlines the importance of measuring the effects of climate change on human health when assessing the social cost of carbon.</p>
<p>Reducing greenhouse gas emissions <a href="https://www.sciencedirect.com/science/article/pii/S0040162514000146">will improve</a> the health of Australians, especially by reducing air pollution from electricity generation and road transport. Every year, around 2,600 (2% of) Australian deaths are attributed to <a href="https://www.mdpi.com/1660-4601/18/1/254">air pollution</a> from human activities such as transport, mining, and power generation using fossil fuels. </p>
<p>And as the planet continues to warm, heatwaves, bushfires and floods will bring a heavier social impact. For example, natural hazards are responsible for <a href="https://actuaries.logicaldoc.cloud/download-ticket?ticketId=38cecc1c-68e2-4433-8822-58cd3d0ccf42">an estimated</a> 30% of total insurance costs today. Australian home insurance premiums would increase by as much as 15% (A$782 million) by 2050 if global emissions continue unabated. </p>
<p>So let’s explore what the social cost of carbon entails, and why it should inform policymaking in Australia in areas such as fossil fuel extraction, infrastructure projects and emissions reduction.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/what-is-the-social-cost-of-carbon-2-energy-experts-explain-176255">What is the ‘social cost of carbon’? 2 energy experts explain</a>
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<h2>What is the social cost of carbon?</h2>
<p>The <a href="https://www.rff.org/publications/explainers/social-cost-carbon-101/">social cost of carbon</a> is a monetary value of the harms of climate change associated with emitting an additional tonne of carbon dioxide.</p>
<p>Estimating this cost should capture harms to human health, decreased agricultural productivity, damages from natural disasters and other effects on the economy.</p>
<p>A study this month in <a href="https://www.nature.com/articles/s41586-022-05224-9">Nature</a> put the global social cost of carbon at A$275 per tonne of CO₂ released. Impacts on health (49%) and agriculture (45%) accounted for most of this.</p>
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<a href="https://images.theconversation.com/files/483407/original/file-20220908-9695-8gzz17.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/483407/original/file-20220908-9695-8gzz17.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/483407/original/file-20220908-9695-8gzz17.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/483407/original/file-20220908-9695-8gzz17.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/483407/original/file-20220908-9695-8gzz17.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/483407/original/file-20220908-9695-8gzz17.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/483407/original/file-20220908-9695-8gzz17.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/483407/original/file-20220908-9695-8gzz17.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">The estimate should cover harms from natural disasters.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
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<p>Climate change poses grave risks to many Australian homes, lives and livelihoods through, for example, worsening <a href="https://theconversation.com/no-not-again-a-third-straight-la-nina-is-likely-heres-how-you-and-your-family-can-prepare-188970">floods</a>, <a href="https://theconversation.com/the-world-endured-2-extra-heatwave-days-per-decade-since-1950-but-the-worst-is-yet-to-come-141983">heatwaves</a> and <a href="https://theconversation.com/wildlife-recovery-spending-after-australias-last-megafires-was-one-thirteenth-the-2-7-billion-needed-188459">bushfires</a>.</p>
<p>Australia’s new climate change law legislates emissions reduction of 43% below 2005 levels by 2030, and reaching net-zero by 2050. It also requires climate policy benefits to be assessed each year. </p>
<p>But we don’t know exactly how the assessments will be conducted, and the law does not explicitly mention measuring the social cost of carbon.</p>
<h2>Weighing up the social cost of projects</h2>
<p>Accounting for the social cost of carbon would lead to investment and policy decisions that support emissions reduction. It would also deter support for projects that increase emissions, such as new coal mines. </p>
<p>Decision-makers often use a cost-benefit analysis to assess and compare projects. If a project increases emissions, the social cost of carbon multiplied by the expected emissions should be added to the overall costs of the project.</p>
<p>Projects that decrease emissions, such as a new offshore wind farm, should have these benefits included in the assessment, bringing the overall net cost of the project down. Infrastructure Australia’s <a href="https://www.infrastructureaustralia.gov.au/sites/default/files/2021-07/Assessment%20Framework%202021%20Guide%20to%20economic%20appraisal.pdf">guide to economic appraisal</a> mentions such an approach.</p>
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<a href="https://images.theconversation.com/files/483195/original/file-20220907-19-vqciq3.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/483195/original/file-20220907-19-vqciq3.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/483195/original/file-20220907-19-vqciq3.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=300&fit=crop&dpr=1 600w, https://images.theconversation.com/files/483195/original/file-20220907-19-vqciq3.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=300&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/483195/original/file-20220907-19-vqciq3.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=300&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/483195/original/file-20220907-19-vqciq3.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=378&fit=crop&dpr=1 754w, https://images.theconversation.com/files/483195/original/file-20220907-19-vqciq3.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=378&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/483195/original/file-20220907-19-vqciq3.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=378&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">How to apply the SCC in decisions related to emissions.</span>
<span class="attribution"><span class="source">RFF</span></span>
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<p>The United States and <a href="https://climateinstitute.ca/is-canada-underestimating-the-benefits-of-climate-action/">Canada</a> already include the social cost of carbon in assessments of federal regulatory proposals and investments. Some <a href="https://costofcarbon.org/states">14 US states</a>, including California and New York, also use the measure. </p>
<p>Last year, the Biden administration announced it would increase the <a href="https://blog.ucsusa.org/rachel-cleetus/the-social-cost-of-carbon-gets-an-interim-update-from-the-biden-administration/">social cost of carbon</a> to A$76 per tonne of CO₂, which is much higher than the A$10 per tonne of CO₂ used by the Trump administration. </p>
<p>Also in 2021, the Australian Capital Territory became the first and only Australian jurisdiction to <a href="https://www.cmtedd.act.gov.au/open_government/inform/act_government_media_releases/rattenbury/2021/considering-the-social-cost-of-carbon">adopt</a> the social cost of carbon. It was set at an interim A$20 per tonne of CO₂ and will be reviewed in future.</p>
<h2>What we’re calling for</h2>
<p>A key component of calculating the social cost of carbon is a damage function that typically uses a single equation to estimate a global GDP loss. </p>
<p>However, as we argue in <a href="https://doi.org/10.1016/S2542-5196(22)00196-6">our letter</a>, regional and sub-national damage functions would better capture the diverse range of climate change impacts, especially for human health and agriculture.</p>
<p>For example, losses in agricultural and labour productivity from heat stress <a href="https://agupubs.onlinelibrary.wiley.com/doi/full/10.1029/2018EF000922">differ by country</a>. Economic losses range from less than 2% per year to over 28% per year in 2100, depending on the country and emissions scenario used. </p>
<p>Also, climate zones are a key determinate of <a href="https://link.springer.com/article/10.1007/s10584-019-02519-1">the number of deaths</a> associated with extremely hot and cold temperatures. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/heat-kills-we-need-consistency-in-the-way-we-measure-these-deaths-120500">Heat kills. We need consistency in the way we measure these deaths</a>
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<p>Our arguments are echoed by a US <a href="https://nap.nationalacademies.org/catalog/24651/valuing-climate-damages-updating-estimation-of-the-social-cost-of">Interagency Working Group</a> on the social cost of carbon. In 2017, it recommended separating market and non-market climate damages by region and sector.</p>
<p>Australia’s new annual climate change statement should also explicitly examine the health benefits of climate policies. These are likely to include fewer respiratory illnesses as a result of cleaner air, and increases in exercise associated with active travel options such as walking and cycling.</p>
<p>Understanding these health benefits will also improve decision-making and could change our approach to dealing with climate change.</p>
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<a href="https://images.theconversation.com/files/284453/original/file-20190717-147307-j7e065.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/284453/original/file-20190717-147307-j7e065.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/284453/original/file-20190717-147307-j7e065.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=425&fit=crop&dpr=1 600w, https://images.theconversation.com/files/284453/original/file-20190717-147307-j7e065.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=425&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/284453/original/file-20190717-147307-j7e065.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=425&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/284453/original/file-20190717-147307-j7e065.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=534&fit=crop&dpr=1 754w, https://images.theconversation.com/files/284453/original/file-20190717-147307-j7e065.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=534&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/284453/original/file-20190717-147307-j7e065.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=534&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">How climate zones differ across Australia.</span>
<span class="attribution"><span class="source">Longden (2019)</span></span>
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</figure>
<h2>Better climate decision-making</h2>
<p>Climate change and related extreme events are already being felt in Australia. Back-to-back floods this year and the devastating Black Summer bushfires are just a few examples of our vulnerability to extreme weather events. </p>
<p>Governments must account for the impacts of these events when making decisions. Annual assessments of climate change policies are a decent start. Establishing a robust method to explicitly measure the social cost of carbon would go one better.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/222-scientists-say-cascading-crises-are-the-biggest-threat-to-the-well-being-of-future-generations-131551">222 scientists say cascading crises are the biggest threat to the well-being of future generations</a>
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<img src="https://counter.theconversation.com/content/190050/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Thomas Longden receives funding from the Healthy Environments And Lives (HEAL) National Research Network as part of the National Health and Medical Research Council special initiative in Human Health and Environmental Change (grant number 2008937).
He also receives funding from the Australian Government Department of Defence.
He is a member of the ACT Climate Change Council, which provides advice to the Minister for Water, Energy and Emissions Reduction on reducing greenhouse gas emissions and adapting to climate change. </span></em></p><p class="fine-print"><em><span>Richard Norman receives funding from the NHMRC through the HEAL Network</span></em></p><p class="fine-print"><em><span>Sotiris Vardoulakis is the Director of the Healthy Environments And Lives (HEAL) Network, which receives funding from the NHMRC Special Initiative in Human Health and Environmental Change. He also receives funding from the Australian Research Council, the Department of Foreign Affairs and Trade, the NSW Government, CSIRO, Asthma Australia, and Dyson. He is a member of the Public Health Association of Australia and of the Climate and Health Alliance.</span></em></p><p class="fine-print"><em><span>Tom Kompas receives funding from the Department of Agriculture, Fisheries and Forestry and the Victorian Department of Environment, Land, Water and Planing. </span></em></p>Every year, air pollution kills 2,600 Australians. Australia’s new climate policy regime must account for this and other harms climate change wreaks on society.Thomas Longden, Fellow, Crawford School of Public Policy, Australian National UniversityRichard Norman, Associate Professor in Health Economics, Curtin UniversitySotiris Vardoulakis, Professor of Global Environmental Health, The Australian National UniversityTom Kompas, Professor of Environmental Economics and Biosecurity, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1762552022-02-12T16:36:52Z2022-02-12T16:36:52ZWhat is the ‘social cost of carbon’? 2 energy experts explain<figure><img src="https://images.theconversation.com/files/446038/original/file-20220212-17-f9qw0n.jpg?ixlib=rb-1.1.0&rect=0%2C13%2C4360%2C2865&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The Capitol Power Plant, which uses fossil fuels.</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/ObamaClimatePolitics/55211e853add422cb03911d1e33eed21/photo">AP Photo/Carolyn Kaster</a></span></figcaption></figure><p>When a power plant runs on coal or natural gas, the greenhouse gases it releases cause harm – but the power company isn’t paying for the damage. </p>
<p>Instead, the costs show up in the billions of tax dollars spent each year to deal with the effects of climate change, such as fighting wildfires and protecting communities from floods, and in rising insurance costs.</p>
<p>This damage is what economists call a “<a href="https://www.sciencedaily.com/releases/2021/03/210301133829.htm">negative externality</a>.” It is a cost to society, including to future generations, that is not covered by the price people pay for fossil fuels and other <a href="https://www.epa.gov/ghgemissions/inventory-us-greenhouse-gas-emissions-and-sinks">activities that emit greenhouse gases</a>, like agriculture. </p>
<p>To try to account for some of the damage, federal policymakers use what’s known as a “social cost of carbon.” </p>
<h2>A tug-of-war over the social cost</h2>
<p>The social cost of carbon, a dollar figure per ton of carbon dioxide released, is factored into <a href="https://www.archives.gov/federal-register/codification/executive-order/12291.html">the costs and benefits of proposed regulations</a> and purchasing decisions, such as whether the Postal Service should buy electric- or gasoline-powered trucks, or where to set emissions standards for coal-fired power plants. </p>
<p>That extra social cost can tip the scales for whether a regulation’s costs appear to outweigh its benefits.</p>
<p>The Trump administration slashed the social cost to <a href="https://www.science.org/content/article/trump-downplayed-costs-carbon-pollution-s-about-change">between $1</a> and $7 per metric ton of carbon dioxide – low enough that the administration could justify rolling back EPA regulations on <a href="https://www.epa.gov/sites/default/files/2018-08/documents/utilities_ria_proposed_ace_2018-08.pdf">power plant emissions</a> and <a href="https://www.epa.gov/regulations-emissions-vehicles-and-engines/safer-affordable-fuel-efficient-safe-vehicles-proposed">vehicle fuel efficiency</a>.</p>
<p>The Biden administration temporarily raised it to $51, close to its pre-Trump level, and has been preparing to finalize a new social cost that might encourage regulators to push for emissions cuts in everything from agriculture to transportation to manufacturing.</p>
<h2>What social cost means for you</h2>
<p>One of Joe Biden’s <a href="https://www.whitehouse.gov/briefing-room/presidential-actions/2021/01/20/executive-order-protecting-public-health-and-environment-and-restoring-science-to-tackle-climate-crisis/">first actions</a> as president was to reverse the Trump administration’s bargain-basement accounting of the “social cost.” The Biden administration <a href="https://www.whitehouse.gov/cea/written-materials/2021/02/26/a-return-to-science-evidence-based-estimates-of-the-benefits-of-reducing-climate-pollution/">returned it to the Obama-era level, adjusted for inflation</a>, by setting an interim social cost at $51 per metric ton of carbon dioxide that would rise over time.</p>
<p>If that were a carbon tax paid by consumers, it would raise gasoline by about 50 cents per gallon.</p>
<p>But the social cost of carbon has no direct effect on the price of gasoline, electricity, or emissions-intensive goods like steel. Instead, it influences purchasing and investments by the government, and indirectly, by private companies and consumers.</p>
<figure class="align-center ">
<img alt="Biden at a lectern with Hummer EVs in the assembly line behind him." src="https://images.theconversation.com/files/446040/original/file-20220212-25314-wqw7gl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/446040/original/file-20220212-25314-wqw7gl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/446040/original/file-20220212-25314-wqw7gl.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/446040/original/file-20220212-25314-wqw7gl.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/446040/original/file-20220212-25314-wqw7gl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/446040/original/file-20220212-25314-wqw7gl.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/446040/original/file-20220212-25314-wqw7gl.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">President Joe Biden spoke at a GM electric vehicle factory in November 2021. The social cost of carbon can signal to automakers that stricter auto emissions rules are likely.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/president-joe-biden-speaks-at-the-general-motors-factory-news-photo/1236628917?adppopup=true">Nic Antaya/Getty Images</a></span>
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</figure>
<p>A higher social cost of carbon signals to companies that the government sees big benefits to cutting greenhouse gas emissions. Figuring in damage from emissions also helps it justify investments in green technology.</p>
<p>For instance, the U.S. Postal Service asked Congress in 2022 to approve $11.3 billion for a <a href="https://apnews.com/0a0ead5536be0e3561b4cb2fccccb7a3">new fleet</a> of gasoline-powered mail delivery trucks. Those vehicles would burn through <a href="https://www.washingtonpost.com/climate-environment/2022/02/02/usps-trucks-epa-climate-change/">110 million gallons of gasoline a year</a>. At $51 per ton of emitted carbon, that purchase implies a social cost of $1.1 billion over 20 years. Incorporating such costs might push the government to consider <a href="https://www.government-fleet.com/10150653/zeta-usps-shows-bias-in-reasoning-for-ice-vehicles">including electric vehicles</a> in the future postal service fleet.</p>
<p>Currently, economists calculate the social cost by using <a href="https://www.carbonbrief.org/qa-how-integrated-assessment-models-are-used-to-study-climate-change">integrated assessment models</a> that bring together long-term projections for population, economic growth and greenhouse gas emissions. These models use emissions scenarios to estimate future climate change, and then calculate the effects on the country’s – and the world’s – GDP, and they can vary widely depending on the assumptions used. </p>
<p>For example, damage estimates for 2100 produced by the three models currently used in the government’s cost-setting process range from $80 to $290 per ton. The Biden administration set the interim social cost to rise to $85 by 2050 to account for greater impact of climate change over time.</p>
<p>Using models to produce such estimates have become a routine part of policymaking, but they are also <a href="https://www.nber.org/reporter/2017number3/integrated-assessment-models-climate-change">massively uncertain</a>.</p>
<h2>Why Trump’s social cost was so much lower</h2>
<p>The Trump administration’s estimate was lower for two reasons: It accounted for climate damage only within U.S. borders; and the administration placed a lower value on future costs by setting a discount rate of 7%, more than double the 3% used by Obama and Biden. Economists use different rates to “discount” future benefits versus the cost we pay today to get there. A high discount rate on climate means we put a lower value on damages that occur in the future. </p>
<p>Unsurprisingly, discount rates are contentious. New York state uses a <a href="https://www.dec.ny.gov/press/122070.html">2% discount rate</a> to produce its current social cost of carbon of $125 per ton. Some analysts argue for a 0% discount rate because anything higher places a lower value on costs borne by future generations.</p>
<p><iframe id="1gNSL" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/1gNSL/7/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p>Several Republican state attorneys general sued to try to block Biden’s interim increase, and a <a href="https://cdn.theconversation.com/static_files/files/1972/cain-ruling-scc-021122.pdf">federal judge in Louisiana agreed</a> with their argument that global damages could not be considered in social costs tailored for U.S. regulations. The judge issued an injunction <a href="https://apnews.com/article/climate-joe-biden-business-trending-news-louisiana-8d06087eb01ebdcf8f60be06a99c05d0">blocking Biden’s interim increase</a>. But an appeals court <a href="https://cdn.theconversation.com/static_files/files/2049/5th_Cir_Stay_of_SCC_injunction.pdf?1647527400">stayed that injunction</a>, allowing the higher social cost of carbon to again be used while the ruling was appealed, and the U.S. Supreme Court in May 2022 <a href="https://www.scotusblog.com/2022/05/justices-decline-to-block-biden-policy-on-social-costs-of-greenhouse-gases/">declined to lift the stay</a>. A similar lawsuit in Missouri <a href="https://www.reuters.com/legal/litigation/rep-ags-appeal-social-costs-greenhouse-gas-lawsuit-2021-09-03/">was dismissed</a>, and the Supreme Court <a href="https://www.eenews.net/articles/the-legal-battle-over-bidens-climate-metric-isnt-over/">declined to review it</a>.</p>
<p>Some scholars debate whether a social cost of carbon should be used at all.</p>
<p>The United Kingdom uses a “cost effectiveness analysis” instead to determine the value of carbon removal. That method uses a target – net-zero emissions – and calculates the cheapest route to get there. Some <a href="https://www.nber.org/papers/w28472">prominent scholars</a> are recommending the U.S. adopt the U.K. approach, while <a href="https://www.science.org/doi/10.1126/science.abi7813">others</a> object.</p>
<h2>Other options: Carbon taxes and emissions caps</h2>
<p>There are other ways to account for the costs of climate change.</p>
<p>A <a href="https://www.taxpolicycenter.org/briefing-book/what-carbon-tax">carbon tax</a> is more straightforward and effective, but tougher to enact because it requires Congress to act. Such a tax would dissuade people from burning fossil fuels by taxing them for the damage those emissions cause – the negative externality.</p>
<p>Another form of carbon pricing uses a marketplace for companies to trade a declining number of emissions permits. Such <a href="https://www.epa.gov/acidrain/acid-rain-program">cap-and-trade</a> programs are in place today in the European Union, <a href="https://www.rggi.org/">a few U.S. states</a>, including <a href="https://ww2.arb.ca.gov/our-work/programs/cap-and-trade-program">California</a> and <a href="https://www.energypolicy.columbia.edu/washington-s-carbon-pricing-bill-model-other-states">Washington</a>, and elsewhere.</p>
<p>Taxes and emissions caps would reduce carbon emissions, but they are unpopular with voters and Congress because they raise prices. A social cost of carbon is easier both to enact and to modify through regulatory review, without legislation. It allows the government the flexibility to address climate through routine policymaking – but can also be changed by subsequent administrations.</p>
<p><em>This article was originally published Feb. 12, 2022.</em></p><img src="https://counter.theconversation.com/content/176255/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The social cost helps regulators factor in harm from climate change when they consider new rules and purchases, like buying electric- vs. gas-powered trucks for the Postal Service.Jim Krane, Fellow in Energy Studies, Baker Institute for Public Policy; Lecturer, Rice UniversityMark Finley, Fellow in Energy and Global Oil, Baker Institute for Public Policy, Rice UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1080512018-12-12T19:12:22Z2018-12-12T19:12:22ZWe can’t know the future cost of climate change. Let’s focus on the cost of avoiding it instead<figure><img src="https://images.theconversation.com/files/250181/original/file-20181212-76980-1ywonao.jpg?ixlib=rb-1.1.0&rect=35%2C21%2C4709%2C3137&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Economists have searched for the mythical balance between the cost of climate action, and the future cost of doing nothing.</span> <span class="attribution"><span class="source">Joop Hoek/Shutterstock.com</span></span></figcaption></figure><p>As delegates at the <a href="https://theconversation.com/au/topics/cop24-62779">UN climate summit in Katowice, Poland</a>, discuss the possibility of restraining global warming to 1.5°C, it might sound like a reasonable question to ask how much money it will cost if they fail.</p>
<p>Economists have spent the past 25 years trying – and largely failing – to agree on the “right” answer to this question. It’s an important consideration, because governments are understandably keen to balance the benefits of limiting long-term climate damage with the more immediate costs of reducing greenhouse emissions.</p>
<p>In simple economics terms, we can ask what price would be worth paying today to avoid emitting a tonne of carbon dioxide, given the future damage costs that would avoid.</p>
<p>This mythical figure has been called the “social cost of carbon”, and it could serve as a valuable guide rail for policies such as carbon taxes or fuel efficiency standards. But my <a href="https://onlinelibrary.wiley.com/doi/full/10.1002/wcc.558">recent research</a> suggests this figure is simply too complicated to calculate with confidence, and we should stop waiting for an answer and just get on with it.</p>
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Read more:
<a href="https://theconversation.com/paul-romer-and-william-nordhaus-why-they-won-the-2018-economics-nobel-104588">Paul Romer and William Nordhaus – why they won the 2018 'economics Nobel'</a>
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<p>While some climate economists have put the social cost of carbon at hundreds or even <a href="https://www-sciencedirect-com.virtual.anu.edu.au/science/article/pii/S0959378013002203?via%3Dihub">thousands of dollars</a> per tonne of CO₂, one of the most <a href="https://www.pnas.org/content/114/7/1518">influential analyses</a>, by Yale University economist William Nordhaus, offers a much more modest figure of just over US$30.</p>
<p>Nordhaus <a href="https://theconversation.com/paul-romer-and-william-nordhaus-why-they-won-the-2018-economics-nobel-104588">won this year’s Nobel Prize in Economics</a>, but his analysis has some uncomfortable conclusions for those familiar with the science.</p>
<p>At this level, it will be economically “optimal” for the world to reduce its CO₂ emissions quite slowly, so that global warming peaks at about 4°C some time next century. But this certainly doesn’t sound optimal from a <a href="https://theconversation.com/new-un-report-outlines-urgent-transformational-change-needed-to-hold-global-warming-to-1-5-c-103237">scientific perspective</a>.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/249413/original/file-20181207-128199-xlxzz4.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/249413/original/file-20181207-128199-xlxzz4.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/249413/original/file-20181207-128199-xlxzz4.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=405&fit=crop&dpr=1 600w, https://images.theconversation.com/files/249413/original/file-20181207-128199-xlxzz4.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=405&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/249413/original/file-20181207-128199-xlxzz4.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=405&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/249413/original/file-20181207-128199-xlxzz4.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=509&fit=crop&dpr=1 754w, https://images.theconversation.com/files/249413/original/file-20181207-128199-xlxzz4.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=509&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/249413/original/file-20181207-128199-xlxzz4.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=509&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Reconstructed global mean temperature anomalies for 0–2000 CE, and DICE-2016R projections for 2015–2400.</span>
<span class="attribution"><span class="source">CREDIT</span>, <span class="license">Author provided</span></span>
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<h2>The impossibility of knowing the social cost of carbon</h2>
<p>Calculating this magical economic balancing point is the holy grail of climate economics, and sadly it also seems to be an impossible task, because the question is so complex as to be unanswerable.</p>
<p>Why so? Normally, we gain knowledge via three main methods. The first option is to design an <em>experiment</em>. If that’s impossible, we can look for a similar case to observe and <em>compare</em>. And if that too is impossible, we can design a <em>model</em> that might hopefully answer our questions. </p>
<p>Generally, the laws of physics fall into the first category. It’s pretty straightforward to design an <em>experiment</em> to demonstrate the heat-trapping properties of CO₂ in a lab, for instance.</p>
<p>But we can’t do a simple experiment to assess the global effects of CO₂ emissions, so instead climatologists have to fall back on the second or third options. They can <em>compare</em> today’s conditions with previous fluctuations in atmospheric CO₂ to gauge the likely effects. They also design <em>models</em> to forecast future conditions on the basis of known physical principles.</p>
<p>By contrast, economists trying to put a dollar value on future climate damage face an impossible task. Like scientists, they cannot usefully test or make comparisons, but the economic effects of future climate change on an unprecedented 10 billion people are too fiendishly complex to model with confidence. </p>
<p>Unlike the immutable laws of physics, the laws of economics depend on markets, which in turn rely on trust. This trust could break down in some catastrophic future drought or deluge. So economists’ various rival calculations for the social costs of carbon are all based on unavoidable guesswork about the value of damage from unprecedented future warming.</p>
<p>This view is understandably unpopular with most climate economists. Many new studies <a href="https://www.researchgate.net/publication/320800903_Quantifying_the_economic_risks_of_climate_change">claim</a> that recent statistical techniques are steadily improving our estimates of the value of climate damage, based mainly on the local economic effects of short-run temperature and other weather changes in recent decades. </p>
<p>But so far, the world has experienced only about 1°C of global warming, with at most 0.3°C from one year to the next. That gives us almost no way of knowing the damage from warming of 3°C or so; it may turn out to be many times worse than projected from past damage, as various tipping points are breached.</p>
<h2>Focus on emission reduction, not damage cost</h2>
<p>One reason why economists keep trying to value climate damage is a <a href="https://www.epa.gov/laws-regulations/summary-executive-order-12866-regulatory-planning-and-review">1993 US Presidential Executive Order</a> that requires cost-of-carbon estimates for use in US regulations. But my <a href="https://onlinelibrary.wiley.com/doi/full/10.1002/wcc.558">findings</a> support what many other climate economists have been doing anyway. That is to build models that ignore the future dollar cost of climate damage, and instead look at feasible, low-cost ways to cut emissions enough to hit physical targets, such as limiting global warming to 1.5°C or 2°C, or reaching zero net emissions by 2100. </p>
<p>Once we know these pathways, we don’t need to worry about the future cost of climate damage – all we need to ask is the cost of reducing emissions by a given amount, by a given deadline.</p>
<p>Of course, these costs are still deeply uncertain, because they depend on future developments in renewable energy technologies, and all sorts of other economic factors. But they are not as fiendishly uncertain as trying to pin a dollar value on future climate damage.</p>
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Read more:
<a href="https://theconversation.com/fresh-thinking-the-carbon-tax-that-would-leave-households-better-off-107177">Fresh thinking: the carbon tax that would leave households better off</a>
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<p>Focusing on the cost of emissions-reduction pathways allows researchers to put their effort into practical issues, such as how far and fast countries can shift to zero-emission electricity generation. Countries such as Sweden and the UK have already begun implementing this kind of action-oriented climate policies. While far from ideal, they are among the best-ranked major economies in the <a href="https://www.climate-change-performance-index.org/sites/default/files/documents/the_climate_change_performance_index_2018.pdf">Climate Change Performance Index</a>. Australia, by contrast, is ranked third worst.</p>
<p>But aren’t trillion-dollar <a href="https://www.economist.com/united-states/2018/12/01/a-government-report-outlines-what-a-warmer-world-means-for-america">estimates of future warming damage</a>, as featured in the recent <a href="https://www.globalchange.gov/nca4">US Fourth National Climate Assessment</a>, necessary ammunition for advocates of climate action? Maybe, but it is still important to appreciate that these estimates are founded on a large chunk of guesswork. </p>
<p>Setting climate targets will always be a political question as well as a scientific one. But it’s an undeniably sensible aim to keep climate within the narrow window that has sustained human civilisation for the past 11,000 years. With that window <a href="https://theconversation.com/new-un-report-outlines-urgent-transformational-change-needed-to-hold-global-warming-to-1-5-c-103237">rapidly closing</a>, it makes sense for policymakers just to focus on getting the best bang for their buck in cutting emissions.</p><img src="https://counter.theconversation.com/content/108051/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jack Pezzey is a member of GetUp! </span></em></p>For decades, economists have pondered the ‘social cost of carbon’ - the price worth paying to avoid the future costs of greenhouse emissions. But a new analysis suggests this quest is impossibly complex.Jack Pezzey, Senior Fellow, Fenner School of Environment and Society, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/980422018-06-18T10:42:42Z2018-06-18T10:42:42ZWhy a minor change to how EPA makes rules could radically reduce environmental protection<figure><img src="https://images.theconversation.com/files/223373/original/file-20180615-85819-162dk5f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Tighter emissions standards create costs for truck manufacturers yet provide health benefits for society. How should they be weighed?</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/soft-focus-smoke-truck-exhaust-393114067?src=73_t_FBFY50B8e7__gkuYg-1-0">Lesterman</a></span></figcaption></figure><p>Since the <a href="https://www.archives.gov/federal-register/codification/executive-order/12291.html">Reagan administration</a>, federal agencies have been required to produce cost-benefit analyses of their major regulations. These assessments are designed to ensure that regulators are pursuing actions that make society better off. </p>
<p>In my experience working on the White House economic team in the Clinton and Obama administrations, I found cost-benefit analysis provides a solid foundation for understanding the impacts of regulatory proposals. It also generates thoughtful discussion of ways to design rules to maximize net benefits to the public. </p>
<p>On June 7, Environmental Protection Agency Administrator Scott Pruitt proposed changing the agency’s approach to this process in ways that sound sensible, but in fact are a radical departure from how government agencies have operated for decades.</p>
<p>As the agency frames it, the goal is to provide “<a href="https://www.epa.gov/newsreleases/epa-administrator-pruitt-proposes-cost-benefit-analysis-reform">clarity and real-world accuracy with respect to the impact of the Agency’s decisions on the economy and the regulated community</a>.” But I see Pruitt’s proposals as an opaque effort to undermine cost-benefit analysis of environmental rules, and thus to justify rolling back regulations.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/223376/original/file-20180615-85840-19v7y6p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/223376/original/file-20180615-85840-19v7y6p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/223376/original/file-20180615-85840-19v7y6p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/223376/original/file-20180615-85840-19v7y6p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/223376/original/file-20180615-85840-19v7y6p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/223376/original/file-20180615-85840-19v7y6p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/223376/original/file-20180615-85840-19v7y6p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/223376/original/file-20180615-85840-19v7y6p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Protesters with Environment America park fuel-efficient vehicles outside the Environmental Protection Agency, as Administrator Scott Pruitt holds a news conference on his decision to scrap Obama administration fuel standards, April 3, 2018.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/EPA-Fuel-Standards/0ba773b86c5948e088319560a1c1f91e/4/0">AP Photo/Andrew Harnik</a></span>
</figcaption>
</figure>
<h2>The importance of co-benefits</h2>
<p>Have you ever done something for more than one reason? An action that you justified because it “kills two birds with one stone”? When a regulation leads to improvements that it was not designed to produce, government agencies call the unexpected payoffs “co-benefits.” </p>
<p>For example, the Clean Air Act’s <a href="https://www.epa.gov/airmarkets/acid-rain-program">Acid Rain Program</a> was designed to reduce sulfur dioxide pollution from electric power plants, a key ingredient in acid rain. Some utilities complied by installing devices called <a href="https://www.duke-energy.com/our-company/environment/air-quality/sulfur-dioxide-scrubbers">scrubbers</a> to capture sulfur dioxide emissions from plant exhaust.</p>
<p>The scrubbers also reduced fine particulate matter, which is linked with a <a href="https://theconversation.com/the-other-reason-to-shift-away-from-coal-air-pollution-that-kills-thousands-every-year-78874">wide range of health effects</a> that can cause premature deaths and illnesses. This represented a huge co-benefit – one that economists have estimated to be worth <a href="https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.27.1.103">US$50 billion to $100 billion </a> yearly. </p>
<p>Historically, federal agencies have given co-benefits full weight in regulatory impact analysis because they help to show how Americans would be better off under the policy for multiple reasons. Pruitt wants to change this policy.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/223378/original/file-20180615-85863-on962t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/223378/original/file-20180615-85863-on962t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/223378/original/file-20180615-85863-on962t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=407&fit=crop&dpr=1 600w, https://images.theconversation.com/files/223378/original/file-20180615-85863-on962t.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=407&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/223378/original/file-20180615-85863-on962t.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=407&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/223378/original/file-20180615-85863-on962t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=511&fit=crop&dpr=1 754w, https://images.theconversation.com/files/223378/original/file-20180615-85863-on962t.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=511&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/223378/original/file-20180615-85863-on962t.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=511&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">According to an EPA analysis, amendments to the Clean Air Act in 1990 that tightened emissions standards will produce benefits through 2020 that exceed their costs by a factor of more than 30 to one.</span>
<span class="attribution"><a class="source" href="https://www.epa.gov/clean-air-act-overview/benefits-and-costs-clean-air-act-1990-2020-second-prospective-study">USEPA</a></span>
</figcaption>
</figure>
<h2>Eliminating co-benefits from rule-making</h2>
<p>Pruitt’s proposal solicits public comment on <a href="https://www.epa.gov/sites/production/files/2018-06/documents/cost_and_benefit_consideration_anprm_pre-pub.pdf">how to weigh co-benefits from pollution reductions</a>. While this request may appear neutral, it reflects an interest in trying to minimize or eliminate consideration of co-benefits. </p>
<p>Why would EPA’s administrator seek to reduce estimated benefits of regulations? As I see it, the agency faces a regulatory conundrum. President Trump issued an <a href="https://www.gpo.gov/fdsys/pkg/FR-2017-02-03/pdf/2017-02451.pdf">executive order</a> in 2017, focused on the costs of regulations that required agencies to eliminate two rules for every new rule they issue. Since regulations have <a href="http://theconversation.com/what-trump-misses-about-regulations-they-produce-benefits-as-well-as-costs-72470">benefits as well as costs</a>, if an existing rule delivers more benefits than costs, then striking it would impose net harm on the public. </p>
<p>For example, Pruitt is seeking to roll back three Obama administration air pollution initiatives: the <a href="https://www.epa.gov/stationary-sources-air-pollution/electric-utility-generating-units-repealing-clean-power-plan-0">Clean Power Plan</a>, which limits greenhouse gas emissions from power plants, and combined carbon emission and fuel economy standards for <a href="https://www.gpo.gov/fdsys/pkg/FR-2018-04-13/pdf/2018-07364.pdf">light-duty vehicles</a> and <a href="https://www.epa.gov/regulations-emissions-vehicles-and-engines/proposed-rule-repeal-emission-requirements-glider">heavy-duty vehicles</a>. Halting these rules would save money for some electric utilities and vehicle manufacturers, but would also greatly increase air pollution.</p>
<p>Specifically, one <a href="http://dx.doi.org/10.1001/jama.2018.7351">recent analysis</a> estimates that eliminating these rules would increase premature deaths from inhaling fine particulate matter by more than 80,000 over a decade. In today’s dollars, and using the <a href="https://www.epa.gov/environmental-economics/mortality-risk-valuation#whatvalue">current value EPA employs to monetize mortality risk reduction</a>, public health costs from reversing these three rules amount to nearly $75 billion per year – far more than any potential benefits to industry.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/Hj7p-NygwDc?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Harvard University professor Douglas Dockery explains the impacts of air pollution on health and the public benefits of pollution controls.</span></figcaption>
</figure>
<p>Even for an administration with a <a href="https://theconversation.com/trump-administrations-zeal-to-peel-back-regulations-is-leading-us-to-another-era-of-robber-barons-84961">strong deregulatory tilt</a>, such a step would raise political red flags. It also would run afoul of another <a href="https://www.archives.gov/files/federal-register/executive-orders/pdf/12866.pdf">executive order</a> that has governed regulatory review in Democratic and Republican administrations since 1993, and requires agencies to issue rules if their benefits justify the costs. The Obama administration concluded that each of these air pollution regulations passed that test.</p>
<p>But what if the EPA can find a way to ignore major categories of benefits, such as zeroing out estimated co-benefits from reducing premature deaths? Then regulatory rollback could appear to pass a cost-benefit test on paper, even if it makes the American people worse off in the real world. </p>
<p>Pruitt has already taken other steps in this direction. Notably, the EPA has reduced its estimate of the <a href="https://theconversation.com/curbing-climate-change-has-a-dollar-value-heres-how-and-why-we-measure-it-70882">damages from climate change</a> from <a href="https://www.epa.gov/sites/production/files/2016-12/documents/sc_co2_tsd_august_2016.pdf">$42 per ton of carbon pollution at the end of the Obama administration</a> to as low as <a href="https://www.epa.gov/sites/production/files/2017-10/documents/ria_proposed-cpp-repeal_2017-10_0.pdf">$1 per ton now</a>. This makes the social benefit of actions that reduce greenhouse gas emissions, such as the Clean Power Plan, look much smaller than they actually are.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/223383/original/file-20180615-85822-1q7em7m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/223383/original/file-20180615-85822-1q7em7m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/223383/original/file-20180615-85822-1q7em7m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=403&fit=crop&dpr=1 600w, https://images.theconversation.com/files/223383/original/file-20180615-85822-1q7em7m.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=403&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/223383/original/file-20180615-85822-1q7em7m.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=403&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/223383/original/file-20180615-85822-1q7em7m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=507&fit=crop&dpr=1 754w, https://images.theconversation.com/files/223383/original/file-20180615-85822-1q7em7m.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=507&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/223383/original/file-20180615-85822-1q7em7m.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=507&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">EPA Administrator William Reilly, left, watches as President George H.W. Bush signs the Clean Air Act Amendments, November 15, 1990.</span>
<span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:George_HW_Bush_William_Reilly_1990b.jpg">USEPA archive/Carol T. Powers</a></span>
</figcaption>
</figure>
<h2>Gaming the numbers</h2>
<p>The late Nobel laureate <a href="https://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1992/becker-facts.html">Gary Becker</a>, who often called for <a href="http://www.becker-posner-blog.com/2011/09/market-failure-compared-to-government-failure-becker.html">limited government intervention in the economy</a>, once wrote that “<a href="https://doi.org/10.1086/468107">cost-benefit analysis may also be useful for undermining misleading claims of self-interested political pressure groups.</a>.” By this he meant that rigorous, transparent assessment of a regulation’s social benefits and costs makes it politically hard for special interests such as the <a href="https://www.nytimes.com/2018/06/02/us/scott-pruitt-coal-joseph-craft.html">coal industry</a> to <a href="https://theconversation.com/epa-staff-say-the-trump-administration-is-changing-their-mission-from-protecting-human-health-and-the-environment-to-protecting-industry-96256">hijack the rule-making process</a>. </p>
<p>Some conservative critics argue that under the Obama administration, the EPA gamed cost-benefit analysis to <a href="https://www.wsj.com/articles/cost-benefit-reform-at-the-epa-1528326402">justify overregulation</a> by introducing what they describe as speculative “social costs” and “social benefits.” But this approach is not new or imprecise. When regulators do cost-benefit analysis, they are calculating the net change in “social welfare” that a regulation is expected to produce. This term comes from the <a href="https://www.whitehouse.gov/sites/whitehouse.gov/files/omb/circulars/A4/a-4.pdf">White House guidance</a> to agencies for conducting such analysis. Economists define social welfare as social benefits minus social costs.</p>
<p>The EPA used this process during the Reagan administration to show that the public would benefit from reducing lead in gasoline. Under President George H.W. Bush, the EPA’s cost-benefit analysis supported phasing out chlorofluorocarbons that were destroying the <a href="https://theconversation.com/is-earths-ozone-layer-still-at-risk-5-questions-answered-91470">ozone layer</a>. Cost-benefit analysis has also supported hundreds of other EPA regulations over more than 30 years. </p>
<p>Indeed, transparent analysis of the social benefits and costs of regulations helps to hold regulators accountable. But if agencies put their thumbs on the scale by excluding major public health benefits, they will weaken the legitimacy of regulatory policy and make the American people worse off.</p><img src="https://counter.theconversation.com/content/98042/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Joseph Aldy receives funding from the Alfred P. Sloan Foundation and the Administrative Conference of the United States. He is affiliated with Resources for the Future, the National Bureau of Economic Research and the Center for Strategic and International Studies. </span></em></p>EPA Administrator Scott Pruitt has proposed steps that would reduce economic benefits to society from new regulations. An economist who worked for Presidents Clinton and Obama calls this a strategy to justify deregulation.Joseph Aldy, Associate Professor of Public Policy, Harvard Kennedy SchoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/708822017-03-13T00:42:19Z2017-03-13T00:42:19ZCurbing climate change has a dollar value — here’s how and why we measure it<figure><img src="https://images.theconversation.com/files/160050/original/image-20170308-24179-ppfhn4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Coal train in Missouri. Assigning a social cost to carbon emissions puts a price on activities that generate them, such as burning fossil fuels.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/rsgranne/179321532/in/photolist-gR53y-f8Ypyj-pVYvmE-4up59H-qQDayK-bRHmsF-byF4Bm-nsMDPS-bHMN9X-gR5bD-bHMMVc-8K5CT-8iRwGq-ekH6Uj-aYY96T-w6VEB-fiZreP-8BZktF-n6k9mM-7ytT3e-dL1Q3v-fQykZw-RE3m4p-6u68ov-r9xyN8-nPieke-9eGaG6-97iG8w-eiGUvW-eXbVPD-9Cdamr-i6GRir-AgMGq-7yydPs-6MFmGv-7YqFTT-PFHiL-eXcsnB-9quDVF-bomDqN-2y36HA-dL1WEv-6p2ko8-bt8h6R-492zzn-5UCpT8-RFezrY-kQA2vR-SfW9fa-bC5Tq7">Scott Granneman/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>President Trump is expected to issue an executive order soon to reverse Obama-era rules to cut carbon pollution, including a moratorium on leasing public lands for coal mining and a plan to reduce carbon emissions from power plants.</p>
<p>Trump and his appointees argue that these steps will bring coal miners’ jobs back (although coal industry job losses reflect <a href="https://theconversation.com/king-coal-is-dethroned-in-the-us-and-thats-good-news-for-the-environment-63910">competition from cheap natural gas</a>, not regulations that have yet to take effect). But they ignore the fact that mitigating climate change will produce large economic gains. </p>
<p>While burning fossil fuels produces benefits, such as powering the electric grid and fueling cars, it also generates widespread costs to society – including damages from climate change that affect people around the world now and in the future. Public policies that reduce carbon pollution deliver benefits by avoiding these damages. </p>
<p>Since the Reagan administration, federal agencies have been <a href="https://www.archives.gov/federal-register/codification/executive-order/12291.html">required</a> to enact only regulations whose potential benefits to society justify or outweigh their potential costs. To quantify benefits from acting to curb climate change, the U.S. government developed a formal measure in 2009 of the value of reducing carbon pollution, which is referred to as the social cost of carbon, or SCC. Currently, federal agencies use an SCC figure of about US$40 per ton in today’s dollars. </p>
<p>Now the <a href="https://qz.com/901053/the-social-cost-of-carbon-the-most-important-number-youve-not-heard-of-could-soon-be-under-attack-by-climate-change-deniers-in-donald-trumps-administration/">Trump administration</a> and critics in <a href="https://www.washingtonpost.com/news/energy-environment/wp/2017/02/28/members-of-congress-met-to-discuss-the-costs-of-climate-change-they-ended-up-debating-its-existence/?utm_term=.780a03495de6">Congress</a> may reduce this figure or even stop using it. EPA Administrator Scott Pruitt’s recent comment that carbon dioxide is not “a primary contributor” to climate change suggests that Pruitt <a href="https://www.nytimes.com/2017/03/09/us/politics/epa-scott-pruitt-global-warming.html?hp&action=click&pgtype=Homepage&clickSource=story-heading&module=first-column-region&region=top-news&WT.nav=top-news&_r=0">may challenge the agency’s 2009 finding</a> that carbon emissions are pollutants and threaten human health.</p>
<p>As an economist for the White House, I was a member of the working group that developed the first government-wide <a href="https://obamawhitehouse.archives.gov/sites/default/files/omb/inforeg/for-agencies/Social-Cost-of-Carbon-for-RIA.pdf">SCC estimate</a>. We can always improve our processes for estimating and using the SCC, but getting rid of it would be a mistake. A well-functioning democracy needs transparency about the economic benefits of investments driven by public policy – as well as the benefits we give up when we walk away from making these investments. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/160054/original/image-20170308-24177-pw85xk.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/160054/original/image-20170308-24177-pw85xk.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=457&fit=crop&dpr=1 600w, https://images.theconversation.com/files/160054/original/image-20170308-24177-pw85xk.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=457&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/160054/original/image-20170308-24177-pw85xk.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=457&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/160054/original/image-20170308-24177-pw85xk.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=574&fit=crop&dpr=1 754w, https://images.theconversation.com/files/160054/original/image-20170308-24177-pw85xk.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=574&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/160054/original/image-20170308-24177-pw85xk.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=574&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">As a result of human activities since the Industrial Revolution, carbon dioxide levels have increased to 400 parts per million, higher than any time in at least the last one million years.</span>
<span class="attribution"><a class="source" href="http://www.globalchange.gov/browse/multimedia/atmospheric-carbon-dioxide-levels">US Global Change Research Program</a></span>
</figcaption>
</figure>
<h2>The value of avoiding hurricanes and wildfires</h2>
<p>Scientists widely agree that carbon dioxide emissions, primarily from burning fossil fuels, <a href="https://www.epa.gov/sites/production/files/2016-08/documents/federal_register-epa-hq-oar-2009-0171-dec.15-09.pdf">pose significant risks to Earth’s climate</a>. Intuitively, it makes sense that reducing carbon emissions benefits society by reducing risks of flooding, wildfires, storms and other impacts associated with severe climate change. </p>
<p>We can estimate the benefits of many goods and services, from pop music to recreation, from the prices people pay for them in markets. But valuing environmental benefits is not so simple. Americans can’t go to the store and buy a stable climate. </p>
<p>Carbon pollution drives global warming that causes many different impacts on the natural and built environment and human health. Because carbon emissions have such broad and diverse impacts, scholars have developed models to characterize the economic benefits (or costs) of reducing them. </p>
<p>Current U.S. government practice draws from <a href="https://academic.oup.com/reep/article/7/1/23/1577964/Developing-a-Social-Cost-of-Carbon-for-US">three peer-reviewed integrated assessment models</a>. An integrated assessment model represents a chain of events, starting with economic activities that involve fossil fuel combustion. This generates carbon emissions, which contribute to climate change. </p>
<p>And climate change causes outcomes that can be measured in monetary terms. For example, rising carbon pollution will increase the likelihood of <a href="http://nca2014.globalchange.gov/report/sectors/agriculture">lower agricultural yields</a>, threaten public health through <a href="http://nca2014.globalchange.gov/highlights/report-findings/extreme-weather">heat stress</a> and damage infrastructure through <a href="http://nca2014.globalchange.gov/highlights/report-findings/extreme-weather">floods and intense storms</a>. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/160052/original/image-20170308-24192-vexk8x.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/160052/original/image-20170308-24192-vexk8x.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/160052/original/image-20170308-24192-vexk8x.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/160052/original/image-20170308-24192-vexk8x.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/160052/original/image-20170308-24192-vexk8x.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/160052/original/image-20170308-24192-vexk8x.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/160052/original/image-20170308-24192-vexk8x.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Flooding in Hoboken, New Jersey after Superstorm Sandy in 2012. Climate change is predicted to increase the frequency and severity of coastal storms.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/accarrino/8179663210">acarrino/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<h2>Thousands of scenarios</h2>
<p>The social cost of carbon represents the damages of one ton of carbon dioxide emitted into the air. To estimate it, economists run models that forecast varying levels of carbon dioxide emissions. They can then model and compare two forecasts – one with slightly higher emissions than the other. The difference in total climate change damages represents the social cost of carbon. </p>
<p>Carbon pollution can remain in the atmosphere for <a href="https://www.ipcc.ch/ipccreports/tar/wg1/016.htm">up to 200 years</a>, so these models are run over a century or more in order to account for long-term damages that carbon emissions impose on society. </p>
<p>SCC estimates are based on chains of events that include many uncertainties – for example, how many tons of carbon will be emitted in a given year, the amount of warming that will result, and how severely this warming will exacerbate risks like floods and heat waves. Since we cannot predict any single scenario with certainty, the U.S. government has modeled hundreds of thousands of different scenarios to produce its SCC estimates. </p>
<p>Some model scenarios, based on admittedly extreme assumptions, produce negative SCC estimates – that is, they find that carbon pollution is good for the planet. But the vast majority of scenarios show that carbon pollution is bad for the planet, and that on average, every ton of carbon dioxide emitted into the atmosphere imposes damages equal to about $40 in today’s dollars. </p>
<h2>Balancing costs and benefits of regulations</h2>
<p>The federal government began calculating a social cost of carbon after the U.S. Court of Appeals for the Ninth Circuit <a href="http://caselaw.findlaw.com/us-9th-circuit/1024716.html">ruled</a> in 2007 that the Department of Transportation had to account for climate benefits from its regulations to improve automobile fuel economy. Environmental groups and a dozen states challenged the regulations, in part because the Bush administration had valued the benefits of cutting carbon dioxide emissions at zero.</p>
<p>In response, the Obama administration created a working group in 2009 with officials from 12 agencies to develop the federal government’s first official SCC estimate. Our initial figure of $25 for <a href="https://obamawhitehouse.archives.gov/sites/default/files/omb/inforeg/for-agencies/Social-Cost-of-Carbon-for-RIA.pdf">2010</a> was updated in <a href="https://obamawhitehouse.archives.gov/sites/default/files/omb/assets/inforeg/technical-update-social-cost-of-carbon-for-regulator-impact-analysis.pdf">2013</a>, <a href="https://obamawhitehouse.archives.gov/sites/default/files/omb/inforeg/scc-tsd-final-july-2015.pdf">2015</a> and <a href="https://obamawhitehouse.archives.gov/sites/default/files/omb/inforeg/scc_tsd_final_clean_8_26_16.pdf">2016</a>, reflecting updates in the underlying models. </p>
<p>Agencies have used these estimates in benefit-cost analyses for scores of federal regulations, including the Environmental Protection Agency’s <a href="https://www.epa.gov/sites/production/files/2015-08/documents/cpp-final-rule-ria.pdf">Clean Power Plan</a>, the Department of Transportation’s <a href="https://www.nhtsa.gov/staticfiles/rulemaking/pdf/cafe/Phase-2-HD-Fuel-Efficiency-GHG-Final-RIA.pdf">medium and heavy-duty vehicle fuel economy standards</a>, and the Department of Energy’s <a href="https://www.regulations.gov/document?D=EERE-2008-BT-STD-0012-0133">minimum efficiency standard for refrigerators and freezers</a>. Some of these studies were required only by <a href="https://www.gpo.gov/fdsys/pkg/FR-2011-01-21/pdf/2011-1385.pdf">executive order</a>, but others were required by law. Unless the authorizing statutes are amended, the Trump administration will have to produce analyses accounting for carbon pollution reduction benefits if it wants to issue new regulations that can withstand legal challenges. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/160051/original/image-20170308-24204-1y5gvp3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/160051/original/image-20170308-24204-1y5gvp3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=386&fit=crop&dpr=1 600w, https://images.theconversation.com/files/160051/original/image-20170308-24204-1y5gvp3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=386&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/160051/original/image-20170308-24204-1y5gvp3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=386&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/160051/original/image-20170308-24204-1y5gvp3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=485&fit=crop&dpr=1 754w, https://images.theconversation.com/files/160051/original/image-20170308-24204-1y5gvp3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=485&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/160051/original/image-20170308-24204-1y5gvp3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=485&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Fuel economy label for gasoline-powered vehicle. Federal agencies have have factored the social cost of carbon into regulations governing vehicle fuel economy and other issues.</span>
<span class="attribution"><a class="source" href="https://www.fueleconomy.gov/feg/Find.do?action=bt1">www.fueleconomy.gov</a></span>
</figcaption>
</figure>
<p>The Trump administration could continue to use SCC estimates in regulatory evaluations, but water them down. For example, some <a href="http://dx.doi.org/10.1126/science.351.6273.569-b">scholars</a> have called for focusing only on domestic benefits – as opposed to total global benefits – of reducing carbon pollution in the United States. Emitting a ton of carbon imposes damages in the United States and around the world, just as a ton emitted in Beijing imposes damages on the United States and other countries around the world. Considering only the domestic impacts of carbon pollution could lower the SCC by three-quarters. </p>
<p>But if the United States ignores the benefits of reducing carbon pollution that other countries enjoy, then those other countries may follow suit and consider only how cutting emissions will benefit them internally. This approach ignores the <a href="http://dx.doi.org/10.1126/science.1259774">strategic value</a> that serves as the primary motivation for <a href="http://www.belfercenter.org/sites/default/files/legacy/files/2016-10_paris-agreement-beyond_v4.pdf">countries to work together to combat climate change.</a> The world would achieve much greater emissions reductions and greater net economic benefits if countries implement policies based on the <a href="http://www.nber.org/papers/w22246">global social cost of carbon</a> instead of a domestic-only SCC.</p>
<p>As climate change science and economics continue to evolve, our tools for estimating benefits from reducing carbon pollution will need to <a href="http://dx.doi.org/http://science.sciencemag.org/content/346/6214/1189">evolve and improve</a>. In January the National Academies of Sciences published a <a href="https://www.nap.edu/catalog/24651/valuing-climate-damages-updating-estimation-of-the-social-cost-of">report</a> that lays out an extensive research agenda for improving the estimation and use of the social cost of carbon. </p>
<p>The federal government has used used benefit-cost analysis to calculate society’s bottom line from regulations for decades. So far, the Trump administration appears to be focused solely on costs – an approach that <a href="https://theconversation.com/what-trump-misses-about-regulations-they-produce-benefits-as-well-as-costs-72470">maximizes the corporate bottom line</a>, but leaves the public out of the equation.</p><img src="https://counter.theconversation.com/content/70882/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Joseph Aldy is affiliated with Resources for the Future, the National Bureau of Economic Research, and the Center for Strategic and International Studies. </span></em></p>To weigh the economic impact of climate change policies, we need to estimate the social cost of carbon. An economist explains how it’s done and why the Trump administration shouldn’t end the practice.Joseph Aldy, Associate Professor of Public Policy, Harvard Kennedy SchoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/504352015-11-09T19:45:41Z2015-11-09T19:45:41ZIf the US had price on carbon, would Keystone XL have made sense?<figure><img src="https://images.theconversation.com/files/101314/original/image-20151109-29317-1sd9xnu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">What would an environmental economist do? </span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/iip-photo-archive/18269677504/in/photolist-tQqSBJ-hBesnP-hBeev7-hBkkUP-hBmjxh-hBkUbx-hBeJVQ-hBjU3Y-hBhSXf-hBhTG3-hBgVsi-hBgaXT-hBgq1F-hBeVEq-hBfQ31-hBibqy-hBd6Ui-qfbFX-2muVMK-stVpJr-8o5tCJ-kTdV5-kJKrM-uMG4wX-kJKi1-kJKb8-qKn1r5-pQDNFd-sLnVUF-kJKyp-kTdTn-7GpFSF-6vTU5h-aD1Cnj-7M25wZ-aBg51p-stMRWb-4XQqJm-qMDgYT-qv5adJ-9YQ4u9-4XRxEo-6Btp8j-hWfQUC-hWgdVk-4XQFWf-4XLuGD-4XL7RD-4XLseT-4XL9ND">iip-photo-archive/flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span></figcaption></figure><p>In announcing the State Department’s decision to reject the permit application for the proposed Keystone XL pipeline, President Obama focused on how this decision fits into the broader context of international negotiations on climate change. </p>
<p>With this decision made, it is useful to step back from the hyperbole that characterized the debate and look at the KXL decision from the perspective of environmental economics. </p>
<p>One way to do that is to factor in the cost of carbon emissions to society. If the US and Canada had a price for carbon, how would it have affected the pipeline project and other decisions like it? Since I was a member of the President’s Council of Economic Advisers in 2013 and 2014, it’s something I’ve thought about.</p>
<h2>‘Externalities’</h2>
<p>The starting point of environmental economics is that pollution creates negative externalities – that is, polluting imposes harm on others in a way not reflected in its price. </p>
<p>The textbook approach to address this problem is to “internalize” the externality by adjusting the price of the polluting activity to reflect the monetary value of that externality. In theory, the polluter is discouraged from polluting because those external costs are now figured into its operations. </p>
<p>In the case of climate change, this approach entails placing a price on greenhouse gas emissions. With a carbon price, some fossil fuels would continue to be extracted because it would still be cost-effective to do so: the market would decide efficiently which energy sources to use, where energy can be saved through energy efficiency improvements, and which fossil fuels to leave in the ground. That is why economists across the political spectrum support an efficient market-based solution that would impose an economy-wide price on carbon dioxide emissions. </p>
<p>Although the United States does not have an economy-wide carbon price, this “first-best” – or the most economically efficient – solution provides a useful framework for climate policy decisions. </p>
<p>To this end, the Office of Management and Budget has adopted an estimate of the externality cost imposed by an additional ton of CO2 emissions on current and future generations when analyzing the costs and benefits of proposed regulations. Called the <a href="http://www3.epa.gov/climatechange/EPAactivities/economics/scc.html">social cost of carbon</a> (SCC), it is currently estimated to be in the range of US$12-$120 per metric ton of CO2, with a central estimate of $40 per ton. </p>
<p>The SCC is a starting point for estimating the carbon price that would apply in an economy-wide carbon price mechanism, such as a carbon tax.</p>
<h2>Calculating Keystone’s carbon surcharge</h2>
<p>Because different fossil fuels have different CO2 intensities – that is, produce differing amounts of CO2 per unit of energy produced – the externality value varies across fuels and so does the carbon price that would apply. </p>
<p>Coal is more carbon-intensive than oil, and oil more so than natural gas, so the carbon price per unit of energy would be highest for coal, next for oil, and lowest for natural gas. </p>
<p>Fuels within the broad classes of coal and oil are not homogeneous, and different ranks of coal and grades of oil have different carbon intensities and thus different carbon prices.</p>
<p>Within oil, some crudes are more energy-intensive to extract and to process and thus have larger “well-to-wheel” carbon emissions. The oil that would have flowed through the Keystone pipeline, extracted from a large sedimentary basin that includes the well-known oil sands of Alberta, has a higher carbon footprint than other, lighter crude.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/101317/original/image-20151109-29312-1tfjb63.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/101317/original/image-20151109-29312-1tfjb63.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/101317/original/image-20151109-29312-1tfjb63.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=431&fit=crop&dpr=1 600w, https://images.theconversation.com/files/101317/original/image-20151109-29312-1tfjb63.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=431&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/101317/original/image-20151109-29312-1tfjb63.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=431&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/101317/original/image-20151109-29312-1tfjb63.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=541&fit=crop&dpr=1 754w, https://images.theconversation.com/files/101317/original/image-20151109-29312-1tfjb63.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=541&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/101317/original/image-20151109-29312-1tfjb63.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=541&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Not all oils are created – or produced – equally. This chart shows the relative greenhouse gas footprint of different sources of crude. WCSB oil sands represents oil that would have been transported via the Keystone XL pipeline.</span>
<span class="attribution"><a class="source" href="http://keystonepipeline-xl.state.gov/documents/organization/221190.pdf">National Energy Technology Laboratory</a></span>
</figcaption>
</figure>
<p>The carbon surcharge, in other words, would vary across types of oil if there was an economy-wide carbon price, with more energy-intensive oils paying a higher tax. </p>
<p>How much greater would the carbon surcharge be for oil sands oil? The State Department estimates that oil sands oil has <a href="http://keystonepipeline-xl.state.gov/">17% greater well-to-wheel CO2 emissions</a> than average US crude, which corresponds to approximately <a href="http://www2.epa.gov/energy/ghg-equivalencies-calculator-calculations-and-references">200 additional pounds of CO2 emissions per barrel</a> relative to average US crude.</p>
<p>Assessed using the $40 per ton central estimate of the SCC, the carbon charge on oil sands crude would be about $4 per barrel higher than the carbon charge on average US crude. Using the OMB’s full range of SCC values of $12-$120/ton CO2, the additional carbon charge would be between $1-$11/barrel. </p>
<p>Said differently, a barrel of oil sands oil would face a market disadvantage of $1-$11, compared with average US crude, simply because of its higher well-to-wheel carbon footprint.</p>
<h2>Rejection as surcharge</h2>
<p>But transporting oil from western Canada by pipeline is less expensive than shipping by rail, which requires specialized cars and/or specialized handling because of the very high viscosity of oil sands oil. So how does a carbon price affect this factor? </p>
<p>The State Department’s <a href="http://keystonepipeline-xl.state.gov/finalseis/index.htm">Final Environmental Impact Statement</a> estimates that it costs between $3 to $9 per barrel more to transport by rail than by pipeline. This cost in the same range of a carbon surcharge for crude from western Alberta ($1-$11 per barrel) were the United States and Canada to have an economy-wide carbon price valued at the SCC.</p>
<p>But what shape does a carbon price take? The first-best way to impose a “carbon adder” is through an economy-wide explicit price. A second-best way is to increase the cost of delivering oil to market by the same amount – something accomplished by denying the pipeline application. </p>
<p>This analysis has focused on the climate costs and benefits, but as with all decisions, there are other costs and benefits to be considered. In the case of Keystone, these include the safety of rail versus pipeline transport, local environmental effects, and America’s position in international climate negotiations. </p>
<p>But this one consideration – the damages associated with the additional carbon emissions of oil sands oil – is effectively accomplished by denying the pipeline application.</p>
<p>Some commentators on the Keystone decision have <a href="https://theconversation.com/the-keystone-xl-pipeline-debate-is-over-but-our-infrastructure-needs-are-not-50358">noted</a> that, at sub-$50 oil, the prospects for new oil sands development are slim, pipeline or not. </p>
<p>But as the past 18 months (and indeed the past 10 years) have taught us, oil prices can have large and persistent swings, and oil prices could well rise into the $60-$80 range that would justify development of so-called unconventional oil sources, such as the oil sands in Canada. </p>
<p>Yet now that the pipeline application has been denied, the additional cost of transporting oil by rail costs would come into play. In the plausible scenario of $60-$80 oil, this added transportation cost differential would mean that less oil sands resources would be developed. </p>
<p>That is the outcome that would be achieved with an economy-wide carbon price, and absent that price, that is the outcome the State Department achieved by denying the pipeline.</p><img src="https://counter.theconversation.com/content/50435/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>James H. Stock does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Environmental economists have long argued a carbon price is the best way to factor in the social cost of climate change. Did Obama effectively use a carbon price to nix the Keystone XL pipeline?James H. Stock, Professor of Political Economy, Harvard Kennedy SchoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/364012015-01-20T19:06:31Z2015-01-20T19:06:31ZThe economic cost of climate change: time for new math<figure><img src="https://images.theconversation.com/files/69300/original/image-20150117-5185-vlw6is.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Hurricane Sandy pummeled cities along the east coast in 2012, causing billions of dollars of damage. </span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Climate change is as much an economic problem as an environmental one. </p>
<p>The effects of climate change, such as damage from more severe weather or health problems from higher temperatures, will impose a cost on society. On the other hand, moving away from a fossil fuel-based energy system will require significant investments into low-carbon technologies. How does society determine which efforts are most cost-effective? </p>
<p>My co-author Fran Moore and I looked at one of the main tools economists and policymakers use to attach numbers to the cost of climate change and decide what to do about greenhouse gas emissions in a study <a href="http://dx.doi.org/10.1038/nclimate2481">published in Nature Climate Change</a>. Called integrated assessment models, or IAMs, these tools are designed to capture complex interactions among the physical, natural and social dimensions of climate change. </p>
<p>Economic models deal with the trade-off between the near-term costs of reducing emissions and the benefits of avoiding future climate change impacts. Reducing, or mitigating, emissions calls for a major transformation of energy and transportation systems to low-carbon technologies, as well as a shift to more sustainable agriculture and forestry practices. </p>
<p>But inaction has cost, too. Climate warming will lead to shifting weather patterns and extreme events, rising seas and a host of impacts to food production, water resources, human health and ecosystems that will unfold over many generations and vary widely across regions.</p>
<p>Our research demonstrates that how climate impacts are represented in these economic models matters for how we address the challenge of climate change. </p>
<p>Specifically, we find that ignoring negative impacts to economic growth could result in underestimating the magnitude of the problem – and the speed at which emissions need to be cut. </p>
<h2>Brake on economic growth</h2>
<p>The monetary cost of climate change is typically represented in IAMs with a damage function, which equates some amount of temperature change to an economic loss. Damages can affect market sectors like agriculture, forestry, and coastal property as well as intangible goods such as biodiversity, environmental quality and human health. </p>
<p>Though IAM development began in earnest in the 1990s, quantifying climate damages has proven difficult, and current damage functions lack credibility and suffer from a limited empirical basis. </p>
<p>Significantly, traditional IAM damage calculations share the assumption that climate change only affects the level of GDP, not its growth rate. The distinction between climate impacts on economic levels versus growth is crucial because growth effects persist into the future, while level effects are transient. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/69386/original/image-20150119-14500-1h7nmm1.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/69386/original/image-20150119-14500-1h7nmm1.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/69386/original/image-20150119-14500-1h7nmm1.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=315&fit=crop&dpr=1 600w, https://images.theconversation.com/files/69386/original/image-20150119-14500-1h7nmm1.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=315&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/69386/original/image-20150119-14500-1h7nmm1.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=315&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/69386/original/image-20150119-14500-1h7nmm1.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=396&fit=crop&dpr=1 754w, https://images.theconversation.com/files/69386/original/image-20150119-14500-1h7nmm1.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=396&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/69386/original/image-20150119-14500-1h7nmm1.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=396&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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</figure>
<p>Said another way, a drop in GDP levels acts as a one-time claim on economic output, but does not directly affect the underlying productive capacity of the economy (and indirect effects are negligible). In contrast, damages to GDP growth rates will cause a permanent reduction in output, which compounds over time. This means that even small impacts to the growth rate can result in very large future damages. </p>
<p>Although this is fairly intuitive, this formulation has not been widely adopted in the IAM community, though <a href="http://www.sciencedirect.com/science/article/pii/S0928765504000338">three</a> <a href="http://www.jstor.org/stable/10.1086/678140">previous</a> <a href="http://www.lse.ac.uk/GranthamInstitute/wp-content/uploads/2014/06/Working-Paper-180-Dietz-and-Stern-2014.pdf">studies</a> have illustrated the potential magnitude of growth effects. Our paper extends these findings by introducing new damage functions based on recent statistical studies discussed below.</p>
<h2>Rolling the DICE</h2>
<p>Despite the fact that IAMs have not included damages to growth rates, recent literature suggests climate change could, in fact, slow economic growth. </p>
<p>Climate change could deplete stocks of social, environmental, institutional and economic capital through extreme events such as <a href="http://www.nber.org/papers/w20352">tropical cyclones</a> or increased risk of <a href="http://www.sciencemag.org/content/341/6151/1235367">civil conflict</a>. </p>
<p>Climate change could also directly affect <a href="http://www.sciencedirect.com/science/article/pii/S0921800906003041">total factor productivity</a> by changing the environment in which technologies were designed to operate and diverting resources away from R&D toward efforts to deal with climate impacts. </p>
<p>Finally, two <a href="https://www.aeaweb.org/articles.php?doi=10.1257/mac.4.3.66">empirical</a> <a href="http://www.nber.org/papers/w17575">studies</a> have found evidence for a relationship between GDP growth rates and temperature.</p>
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<img alt="" src="https://images.theconversation.com/files/69301/original/image-20150117-5182-hagcsc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/69301/original/image-20150117-5182-hagcsc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=388&fit=crop&dpr=1 600w, https://images.theconversation.com/files/69301/original/image-20150117-5182-hagcsc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=388&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/69301/original/image-20150117-5182-hagcsc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=388&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/69301/original/image-20150117-5182-hagcsc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=488&fit=crop&dpr=1 754w, https://images.theconversation.com/files/69301/original/image-20150117-5182-hagcsc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=488&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/69301/original/image-20150117-5182-hagcsc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=488&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p>In our analysis, we use the well-known Dynamic Integrated Climate-Economy (DICE) model with three modifications: we allow temperature to affect economic growth using the statistical method published by <a href="http://scholar.harvard.edu/files/dell/files/aej_temperature.pdf">Dell, Jones and Olken in 2012</a>; we account for society’s adaptation to climate change over time; and we partition the world into two regions to differentiate the impact in high- and low-income countries.</p>
<p>The headline result of this study is that our modified DICE model with growth-effects recommends a mitigation pathway that includes a rapid transition off of fossil fuels. In this model, emissions would be eliminated in the near future in order to stabilize global temperature change well below 2°C. </p>
<p>This stands in stark contrast to the classic DICE model “climate policy ramp” where mitigation increases gradually such that global emissions peak around 2050 and warming exceeds 3°C by 2100. </p>
<p>Another metric often used to measure the cost of climate impacts is the social cost of carbon – the economic damage caused by an additional ton of CO2 – which we find to be several times larger than previous estimates.</p>
<h2>Policy implications</h2>
<p><a href="http://www.eenews.net/climatewire/2015/01/13/stories/1060011557">Media</a> <a href="http://www.greenbiz.com/article/governments-social-cost-carbon-could-be-increase">coverage</a> of this study has focused on policy implications of the social cost of carbon (SCC). However, we are reluctant to draw these types of conclusions from our result.</p>
<p>The higher SCC estimate found in our study is not a definitive value, and thus is not intended to be the basis for action, either at the company or the regulatory level. Also, the actual values we report are subject to several caveats related to the modeling framework and other assumptions. </p>
<p>Instead, our key takeaway is that the social cost of carbon is subject to much more uncertainty than has been suggested in previous estimates. Specifically, the potential for slower economic growth from climate change has not been well studied or implemented in policy models. We hope this work encourages additional research to better understand and account for these potentially important growth-rate effects of temperature change.</p><img src="https://counter.theconversation.com/content/36401/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Delavane Diaz does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Climate change is as much an economic problem as an environmental one. The effects of climate change, such as damage from more severe weather or health problems from higher temperatures, will impose a…Delavane Diaz, PhD candidate, Stanford UniversityLicensed as Creative Commons – attribution, no derivatives.