The Social Cost of Carbon

Abstract: The social cost of carbon is the damage avoided by slightly reducing carbon dioxide emissions. It is a measure of the desired intensity of climate policy. The social cost of carbon is highly uncertain because of the long and complex cause-effect chain, and because it quantifies and aggregates impacts over a long period of time, affecting all people in a wide range of possible futures. Recent estimates are around $\$$80/tCO$_2$.

The Social Cost of Carbon

In "The Social Cost of Carbon", Richard S.J. Tol provides an extensive examination of the complex calculations and the profound implications of the social cost of carbon (SCC). This paper delves into the intricacies of estimating the SCC, a pivotal metric in evaluating the marginal damage of an added tonne of CO₂ emissions, or conversely, the marginal benefit of its reduction.

Estimation Complexity

The estimation of SCC involves a multifaceted cause-effect chain. This process encompasses the growth in atmospheric concentrations due to greenhouse gas emissions, such as CO₂, leading to radiative forcing, and eventually altering several environmental dynamics including temperature and precipitation patterns. These climatic changes trigger broad economic impacts across agriculture, health, labor productivity, and broader social and economic systems. The paper stresses that evaluating the SCC demands not only an understanding of atmospheric sciences but also numerous socioeconomic factors over space and time.

Numerical Insights

The paper highlights variance in SCC estimates, manifested in a dataset containing 6,340 estimates documented in various publications. The findings reveal substantial variability, with a mean value of approximately \$184/tC for emissions in 2010, supported by a standard deviation of \$382/tC, illustrating pronounced uncertainty. Estimates are significantly influenced by discount rates, which modulate the perceived future welfare loss. Typically, as discount rates decrease, leading to higher valuations for future damages, the mean SCC escalates, indicating heightened concern for future welfare impacts.

Controversies and Market Dynamics

Tol illuminates how differing assumptions—often controversial—influence SCC estimates, citing disagreements among economists and interdisciplinary criticisms on methodologies. The paper details the perplexing aggregation of these impacts over diverse populations and the contentious selection of discount rates—ranging from ethical considerations to reflections of market behavior—as pivotal in determining these valuations. The selection of discount rates significantly narrows uncertainties, presenting a subjective component in economic valuation.

Policy Implications and Prospects

SCC serves as a foundational parameter in formulating climate policies, providing a benchmark for determining carbon pricing and emission cuts aligned with maximizing social welfare. Several nations have incorporated SCC in their regulatory frameworks, underscoring its importance in guiding public investments and regulations. However, the multifaceted nature of its estimation demands further scrutiny and refinement, aided by advancements in integrated assessment models and broader representation of global perspectives. Future contributions are anticipated from enhanced modeling capabilities, enriched databases, and increased inclusivity in global discourse.

Conclusion

Richard Tol's paper presents a comprehensive overview of the social cost of carbon, emphasizing its centrality in policy formulation amidst notable challenges in its determination. The evolving landscape in climate change economics, powered by technological and international contributions, promises a more nuanced understanding and application of SCC in global environmental strategies.