The Social Cost of Carbon Emissions
POLICY NOTE
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In principle, the social cost of carbon emissions measures the overall impact of greenhouse gas emissions on societal well-being.
The U.S. government uses estimates of the social costs of carbon (SCC) to perform cost-benefit analyses of proposed emission-control legislation, giving this number a significant role in the economic analysis – and subsequent decision-making – regarding climate change policy.
“The Social Cost of Carbon Emissions,” is a joint Policy Note by SCEPA and the Institute of New Economic Thinking (INET) that reviews the welfare economics theory fundamental to the estimation of the SCC.
Several key points are raised:
The SCC concept is meaningless unless the economy is presumed to be at full microeconomic equilibrium. In that case, society’s willingness to pay for mitigating the adverse effects of greenhouse gas emission must be equal to the marginal cost of mitigation. Many estimates of the SCC are inconsistent, based either on willingness to pay or marginal costs. A discrepancy between the two estimates signals that reducing current consumption to pay for more mitigation is unnecessary.
Most calculations of the SCC are based on the assumption that the social rate of discount is constant. In full dynamic micro equilibrium, however, the discount rate will change over time, meaning that such estimates make no sense.
Numerical estimates of the SCC along a fully optimal path suggest that the marginal cost and benefit of mitigation would be around $200 per ton of carbon. The total annual cost would be around 2% of world GDP, roughly the same amount as spending on defense. As consumption growth slows over time, the discount rate would decline. At the same time, there should be relatively high mitigation spending in the near future to reduce the base level of atmospheric carbon concentration in anticipation of years to come.