Stanford Study: Carbon Cost Should Be Six Times Higher

The “official” social cost of carbon (SCC) pollution was $37 per ton in 2015, according to the U.S. government, based on three economic models.

This number is important, especially to policymakers who need to justify the cost of various actions and compare them to the cost of inaction. It is the result of numerous agencies, and the figure used is the average of them.

Michael Greenstone, the chief economist of President Barack Obama’s Council of Economic Advisors calls it “the most important figure you’ve never heard of.” In fact, there is a wide divergence of opinion on what this number should be, depending on what assumptions are used in the analysis. Even the EPA has a range that runs between $11 and $105, depending on the discount rate used.

However, a study published online this week in the journal Nature Climate Change concludes that the actual figure should be much higher, more than twice the highest value in the EPA’s range. According to study co-author Frances Moore, a PhD candidate in the Emmett Interdisciplinary Program in Environment and Resources at Stanford’s School of Earth Sciences, the actual figure should be $220, almost six times that which is currently being used.

Co-author Delavane Diaz, a PhD candidate in Stanford’s Department of Management Science and Engineering, said: “If the social cost of carbon is higher, many more mitigation measures will pass a cost-benefit analysis.”

In other words, as Greenstone suggested, this is indeed a very important number.

For their study, the authors looked carefully at the assumptions that were being used in the popular model, known as the Dynamic Integrated Climate-Economy (DICE) model, a form of integrated asset modeling (IAM).

They then modified that model, baking in recent empirical findings which showed that climate change can adversely affect economic growth rates, particularly in developing countries.

Previous models only looked at one-time economic costs, ignoring persistent impacts that accumulate over time, which could affect a country’s economic growth rate. Taking this into account results in a considerably higher economic impact.

Specifically, they made three modifications:

  • They allowed climate change to affect the growth rate of the economy;
  • They accounted for adaptation to climate change; and
  • They divided the model into two regions to represent high- and low-income countries.

They particularly wanted to explore the difference between countries, because of the fact that poorer countries will be more vulnerable to climate impacts, like rising sea level or reduced rainfall.

Said Moore: “This effect is not included in the standard IAMs. So, until now it’s been very difficult to justify aggressive and potentially expensive mitigation measures because the damages just aren’t large enough.”

“If poor countries become less vulnerable to climate change as they become richer, then delaying some emissions reductions until they are more fully developed may in fact be the best policy,” Diaz added. “Our model shows that this is a major uncertainty in mitigation policy, and one not explored much in previous work.”

While acknowledging some uncertainties in the analysis that fall short of precisely prescribing the most optimal investment levels, Diaz still maintained that “this does not change the overall result that if temperature affects economic growth rates, society could face much larger climate damages than previously thought, and this would justify more stringent mitigation policy.”

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