What is the Social Cost of Carbon and Why is it Important?

Do you value human health, nature, and the planet? Well, the social cost of carbon is one-way policymakers determine the impacts of business practices. Federally the SCC is pricing in at $51/ton, but the EPA proposes that number could be much higher upwards of $190 per ton. Why is it so expensive? Why is this an important metric for policymakers? We will explore these questions and more in this short blog.

Simply put, the Social Cost of Carbon is the cost associated with business decisions. It measures damages associated with a project including changes in net agricultural productivity, human health, property damages from increased flood risk, and changes in energy system costs, such as reduced costs for heating and increased costs for air conditioning. [1]

Why does this matter?

This is one of the only ways we can measure society’s value to these things. Without a metric or calculation, we don't know the true costs or benefits of our actions. Over 150 regulations use the Social Cost of Carbon in their policy. [2] For example, new regulations on fuel efficiency and economy we have seen the SCC implemented into standards for vehicle tailpipe emissions or electric vehicles.

social cost of carbon in the US — This figure shows the U.S. federal SCCs comparison: Trump's (dark/light red), Biden's interim (yellow), IWG 2013 FUND model (grey), and recent studies (blue).

This chart shows that of the $51 a ton that makes up the SCC $36.6 per ton is allocated to “mortality”. R. Daniel Bressler, a Ph.D. candidate at Columbia University, states that simply taking one coal-fired power plant offline and replacing it with a zero-emissions alternative for just one year, would result in a “mortality benefit of saving 904 lives” over the century. “That would be a lot more impact than a personal decision.” [9 & 5] Climate change is killing us and we need to take serious action. [4]

Calculation

The calculation of the SCC has a few key components. If you are interested in playing around with a calculator yourself I recommend the https://costofcarbon.org/calculator.

1. Prediction of Future Emissions

Forecast future emissions considering variables such as population growth, economic development, and technological advancements.

2. Modeling Future Climate Responses

Simulate the impact of emissions on climate factors like temperature increase and sea level rise using climate models.

3. Assessment of Economic Impacts

Evaluate how predicted climatic changes (temperature rise, sea level rise, etc.) will affect various economic sectors:

Agriculture: Assess impacts on productivity and costs.

Health: Evaluate changes in health outcomes and healthcare costs.

Energy: Estimate changes in energy consumption patterns and costs.

Labor Productivity: Analyze declines in productivity due to health and environmental factors.

4. Conversion of Future Damages to Present-Day Value

Quantify the total economic damages (in terms of costs) caused by the climatic changes.

Apply a discount rate to translate future damages into present-day monetary values.

Components of SCC Calculation

Socioeconomic Predictions: Project future scenarios based on population, economic growth, and emissions.

Climate Projections: Determine how emissions will influence climate conditions, including CO2 lifespan, sea level, temperature changes, and potentially extreme weather events.

Benefits and Costs Analysis:

Agriculture: Impact on crop yields and costs of adaptation.
Coastal Properties: Costs associated with sea level rise and protective measures.
Energy: Adjustments in energy demand and costs due to temperature changes.
Labor: Effects on workers' productivity due to health and environmental factors.
The Discount Rate: This reflects the value placed on future benefits versus present costs, influencing the present value of future damages.

The Importance of the Discount Rate

The choice of discount rate is crucial as it affects the present value of future damages, thereby influencing the calculated SCC. A higher rate discounts future damages more, valuing present benefits more heavily, while a lower rate places greater emphasis on future well-being and costs. I plan to explore the Social Discount Rate (SDR) further in a future blog.

I hope you enjoyed this blog and learned a little more about the SCC and the importance of measuring the costs and benefits of our decisions.

Here are some of the articles I referenced and some other interesting reads!