On the Issues: The Economic Cost of Carbon Emissions

Research from Resources for the Future (RFF) scholars and other collaborators, published last week in the journal Nature, finds that the social cost of carbon (SCC) is significantly higher than the US federal government has estimated previously. The SCC is a measure in dollars of the economic damage to society caused by an incremental ton of carbon dioxide emitted into the atmosphere. The federal government, state governments, and regulatory agencies use the SCC to quantify the benefits and costs of policies that affect carbon emissions, such as power plant regulations. If the federal government adopts the new number, the resulting benefit-cost analysis would present a stronger economic argument for more stringent climate policies.

The new SCC is the result of years of multi-institutional collaboration and leverages models that project the wealth of future societies, population levels, and climate change scenarios, among other factors. This week, we’re unpacking the significance of the SCC by highlighting key components of the research that’s led to the new number.

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What monetary costs are associated with carbon emissions, and how might our estimates of these costs affect and inform climate policy decisions?

The White House Office of Management and Budget recently released an analysis that projects the Inflation Reduction Act could mitigate the costs of climate-related damages by up to $1.9 trillion. To arrive at this dollar figure, the Office of Management and Budget referred to an interim estimate of the social cost of carbon (SCC), which was calculated by a federal interagency working group. The SCC assigns a monetary value to the impacts of carbon dioxide emitted into the atmosphere. A recent blog post coauthored by Resources for the Future (RFF) scholars Brian C. Prest, Jordan Wingenroth, and Kevin Rennert summarizes the results of RFF’s Social Cost of Carbon Initiative, which the team and colleagues published recently in the journal Nature. “Our comprehensive update delivers a central estimate of the SCC of $185 per ton of CO₂, which is 3.6 times larger than the US government’s current interim estimate of $51 per ton,” they say. “Our research finding implies that … policies to reduce greenhouse gas emissions provide significantly greater benefits than have been accounted for previously.”

How does the new SCC estimate account for expected uncertainties in the available data and projections about the future?

One of the motivations behind the initiative to estimate a new SCC was a report by the National Academies of Sciences, Engineering, and Medicine, which evaluated the process by which the Obama administration calculated the SCC. The report found that the interim estimate inadequately dealt with uncertainty in its climate and economic models. The new SCC estimate from the RFF team and colleagues responds directly to the National Academies report, in keeping with the Biden administration’s commitment to consider the report’s recommendations, by employing methods to acknowledge and quantify the amount of uncertainty in their $185 estimate. In a recent episode of Resources Radio, RFF Fellow and Nature study coauthor Brian C. Prest says that the research team accounted for uncertainties in all of the SCC’s key components. “One big uncertainty is how big the economy is going to be 100, 200, or even 300 years from now,” says Prest. “The power of compounding means small changes in growth rates can have big changes in … the size of the economy, and hence the degree of vulnerability to a changing climate.”

What factors account for the difference between the interim SCC estimate of $51, currently used by the federal government, and the updated $185 figure?

A key update in the calculation of the new SCC is the use of a two percent discount rate instead of the three percent discount rate used in the federal government’s interim $51 estimate. The discount rate translates “future dollars into today’s dollars” and measures the amount that people are willing to pay now to mitigate the effects of climate change in the future; for example, a person who asks for $1.02 next year in exchange for $1 today is applying a two percent discount rate. RFF scholars who coauthored the Nature paper discussed discount rates and other related topics at a recent event hosted by RFF. Because of how interest compounds over time, said RFF CEO and President Richard G. Newell at the event, “small changes in interest rates can make a big difference.” The change from three percent to two percent has an outsized effect, approximately doubling the SCC. The three percent discount rate still used by the government is based on a 2003 review of data from the past 30 years up to that point, from 1973 to 2003. “But since then, there’s been a lot of change in interest rates and a lot of sectoral change,” Newell said.

Evergreen Time Machine

RFF research from the Resources archive offers background and possible solutions for the challenges in today’s news.

Widespread climate-induced forest die-off … creates a dangerous carbon cycle feedback, both by releasing large amounts of carbon stored in forest ecosystems to the atmosphere and by reducing the size of the future forest carbon sink.

RFF Senior Advisor Ann M. Bartuska and coauthors, June 2020

This week: Drought, wildfire, and an abundance of dry material on the forest floor are making it more likely that forest fires in California will cause trees to become a source of carbon pollution, rather than a carbon sink.

Coordinating International Climate Policies to Decarbonize the Global Manufacturing

One-fifth of global carbon dioxide emissions comes from the manufacturing sector. National policies designed to reduce those emissions, however, can raise production costs and motivate manufacturers to outsource their operations to countries that allow higher emissions. To review current proposals that aim to balance climate policy with competitiveness in international markets, RFF is hosting experts from the Global Climate Policy Partnership (GCPP) for a panel discussion on September 22. This event marks the official launch of the GCPP, a network of research institutions working together to help major economies and businesses achieve ambitious climate goals. To attend the event online, RSVP here.

Comprehensive Evidence Implies a Higher Social Cost of Carbon Dioxide

In a journal article published last week in Nature, RFF scholars and collaborators from partner institutions introduce their updated estimate of the SCC. “Compared to estimates currently used in policy evaluation,” they say in the paper, “[our SCC] substantially increase[s] the estimated benefits of greenhouse gas mitigation and thereby increase[s] the expected net benefits of more stringent climate policies.”

Damage from Carbon Emissions Is More Costly than Previously Thought

An op-ed published this week in Barron’s outlines the implications of the new SCC estimate and the open-source analysis behind it. Coauthors Maureen Cropper, Richard G. Newell, Brian C. Prest, and Kevin Rennert, all scholars at RFF, say that the research on the updated SCC estimate not only “represent[s] one of the most reliable and detailed economic analyses of the costs of climate change to date, it has also been produced through a fully reproducible and transparent process.”

Examining Flood Insurance, Resilience, and Disaster Recovery in Eastern Kentucky

A recent blog post coauthored by RFF scholars Margaret A. Walls, Sophie Pesek, and Leonard Shabman provides insights about the vulnerability to flooding in rural areas and measures that could be taken to mitigate flood damages. The authors offer suggestions for how to improve flood insurance uptake and disaster resilience in eastern Kentucky, a site of disastrous flooding this summer. “If the nation is going to take a proactive approach to securing flood resilience for these rural Appalachian communities—where climate change is expected to bring increased flood risks,” they say, “then a committed effort must help them access funding and provide support on implementation.”

How the Inflation Reduction Act Can Help Hydrogen Hubs

The Inflation Reduction Act invests in clean hydrogen (hydrogen fuel produced with renewable energy), which may help replace fossil fuels in industrial sectors that are difficult to decarbonize. RFF’s Aaron Bergman and Alan Krupnick analyze the law’s potential effect on the nascent hydrogen industry in a new blog post. “Current hydrogen production technologies release significant carbon emissions, and little economic incentive has existed to date to encourage the use of hydrogen in novel applications,” note Bergman and Krupnick. “The Inflation Reduction Act … may be the missing ingredient that the [hydrogen hubs] need.”

Tackling the Dual Challenges of Energy and Climate, with David Turk

In a recent episode of RFF’s Policy Leadership Series Podcast, RFF CEO and President Richard G. Newell sits down with David Turk, deputy secretary of the US Department of Energy, to discuss the agency’s response to recent high gas prices and how the Department of Energy is working to ensure that historically disadvantaged communities benefit from the transition to clean energy. “From a fairness perspective, from a morality perspective,” says Turk, “[these communities] deserve to have more investment and opportunities for jobs, economic opportunity, healthy air, and healthy water.”

The Causes and Consequences of Illegal Mining in the Brazilian Amazon

Illegal mining in the Brazilian Amazon has proliferated in recent years, to the detriment of local Indigenous groups and the rainforest ecosystem. Manuela Andreoni, a writer at the climate desk of the New York Times, recently joined the Resources Radio podcast to discuss “wildcat” mining operations in Brazil and how societies value—or don’t value—natural resources, ecosystems, and biodiversity. “We haven’t, as a society—and I’m not just talking about Brazil, I’m talking about the world—figured out how to make this standing forest be worth a lot of money,” says Andreoni.

#ChartOfTheWeek

The discount rate, which accounts for the willingness of people today to pay for the future impacts of climate change, has an outsized effect on the SCC: changing the discount rate from two to three percent more than doubles the estimate of the SCC. The federal government uses a three percent discount rate in its benefit-cost analysis, but RFF scholars and collaborators use two percent in their update to the SCC because a lower discount rate reflects recent trends in market interest rates.

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