Politicians, economists, risk assessors, and climate scientists have numbers and models to guide their analysis of the climate emergency.
Climate change risk assessment
David V Wright of the University of Calgary, Faculty of Law, writes that American economist Frank Ackerman called the social cost of carbon (SCC) “the most important number you’ve never heard of.” Times have changed. Today, the SCC figures prominently in climate policy discussions and analyses, and recent developments in Canada and the US are sure to reach any late adopters out there. That’s because the social cost of carbon (SCC) is a cornerstone in the Biden Administration’s ambitious climate action, and this comes at a time when Canada is showing a rejuvenated commitment to this important tool.
A few aspects of the new US context stand out as particularly relevant for Canada. First, the reconvened US IWG will provide renewed institutional might that was lacking for the last four years. In particular, this IWG can resume its leadership role in refining and improving SCC methodologies, and, for better or worse, Canada can comfortably resume its follow-the-leader approach (see here for a detailed account; more discussion on this below). Second, and related to the first point, the US is going to publish its new “interim” SCC values imminently (as well as SCM and SCN), so Canada will likely want to adopt similar revised values to ensure congruence across economies to the extent consistency is desired (which it typically is). Third, it would make sense for Canada to get to work in parallel or in collaboration with the US IWG on a similar timeline toward final revised SCC values by January 2022 (and, to be candid, this may well be happening already; I have not heard word). Fourth, by requiring the IWG to make recommendations on other federal “areas of decision-making, budgeting, and procurement… where SCC, SCN and SCM should be applied”, the Climate EO is signaling potential expansion of spheres where the SCC may be deployed. For example, this may build on emerging practices in the US of integrating the SCC into project-level approval decisions (see this article for discussion of such), something that has not happened in Canada to date (as discussed below, and see my and Meinhard Doelle’s discussion of this here). As such, Canada ought to be considering similar expanded options.1
An explainer by Kevin Rennert and Cora Kingdon reviews the social cost of carbon, from a basic definition to the history of its use in policy analysis. The SCC is used in benefit-cost analysis to quantify the dollar-value of a policy’s effect on climate change due to changes in greenhouse gas emissions. For policies that increase emissions, the expected increase in emissions (in tons) is multiplied by the SCC, and the result is included as part of the total estimated costs of the policy. For policies that decrease emissions, the change in emissions is multiplied by the SCC, and the result is added to the expected benefits of the policy.
Estimates of the SCC are calculated in four steps using specialized computer models.
Step 1: Predict future emissions based on population, economic growth, and other factors.
Step 2: Model future climate responses, such as temperature increase and sea level rise.
Step 3: Assess the economic impact that these climatic changes will have on agriculture, health, energy use, and other aspects of the economy.
Step 4: Convert future damages into their present-day value and add them up to determine total damages.
These four steps are completed to obtain a baseline value for the damages of emissions. Then, the modeling process is repeated with a small additional amount of emissions to see how much it changes the total cost of damages. The increase in damages from the additional emissions provides an estimate of the SCC. The model is then run hundreds of thousands of times to evaluate the uncertainty of the estimates.2Climate change is a classic market failure. The costs of emitting CO2 are borne by society at large, whereas the benefits accrue to those burning fossil fuels. In order to correct the market failure – for instance, with a carbon tax – we need to know the social cost of those CO2 emissions.
Moreover, when governments measure the costs and benefits of a policy or investment decision, they need a value for CO2 emissions. If the SCC is high, then the benefits of cutting CO2 are large and costly climate actions will be justified. If the SCC is low, regulations might be more trouble than they’re worth.3
The Economist asks what impact Joe Biden will have on the fight against climate change. Joe Biden’s climate-friendly energy revolution seeks to find what it will take to fight rising temperatures.
Mr Biden has shown a willingness to pull multiple levers of power in pursuit of his climate agenda, announcing support for action through diplomacy, financial regulation, transport planning and more. The next decade is crucial in averting climate catastrophe, according to the UN’s Intergovernmental Panel on Climate Change. Mr Biden, along with Mr Kerry, will also have to helm America’s efforts at climate diplomacy, helping to persuade other countries to go further, faster. The Biden administration believes it has to co-operate with China to make sufficient progress on reducing global greenhouse-gas emissions, but arguments over security, trade and human rights make that difficult. COP26, the UN’s climate summit scheduled for November in Glasgow, will be a crucial test of the new president’s skills. But he seems committed to the task. Almost all the calls he made to world leaders after winning the election mentioned climate change, according to his transition team. And the world in which Mr Biden assumes office is different from the one he left at the end of the Obama administration. The need for economic recovery from the covid-19 pandemic means that governments are prepared to plough unprecedented sums of money into projects. Renewable energy is cheaper than ever before. Greener pastures might, at last, lie ahead.4
https://www.economist.com/img/b/800/420/90/sites/default/files/images/print-edition/20210220_FBC760.png
The Economist notes the problem is made worse by the fact that some conservative Democrats have their own reservations. Joe Manchin, a Democrat from West Virginia, says that he supports climate action. But he rejects the idea that coal, the dirtiest fossil fuel, might be permanently removed from the world’s energy portfolio.
A decisive American effort to reduce emissions would be a potent signal of solidarity and a great enabler of change. It is unlikely that poor- and middle-income countries, eager to lift their citizens out of poverty, will try hard to curb their emissions if the world’s richest nation declines to limit its own, which are among the world’s largest per person. A vibrant American programme would also guarantee levels of innovation devoted to the fight for a stable climate that easily exceed today’s. America’s wealth, national laboratories, universities, corporate giants and entrepreneurs, if properly harnessed to the task of decarbonisation, will undoubtedly produce novel approaches and technologies that would benefit other nations.5
Nine authors in Nature, offer eight priorities for calculating the social cost of carbon as advice to the Biden administration as it seeks to account for mounting losses from storms, wildfires and other climate impacts.
Biden’s actions mark a return of science-based policy in the United States. An open, transparent and inclusive IWG process will help to re-establish the SCC as central to climate policy. Reversing Trump’s changes will be quick and pragmatic for the interim number. Other steps require much more deliberation. Plenty of scientific and economic judgements need to be made. These include how to deal with endemic uncertainties, including sudden and irreversible ‘tipping points’, such as ice-sheet collapses. Ethical questions must be considered, including the consequences for vulnerable communities and future generations. Other nations use widely different SCC values or overall approaches2. Germany’s 2020 guidance presented two values: €195 (US$235) and €680 ($820). Some countries instead establish a goal for emissions reductions (such as the United Kingdom’s 68% reduction by 2030 compared to 1990 levels) and then focus on minimizing the costs of achieving it, estimated at $20–100 per tonne of CO2. This is called a target-consistent approach. Others have leaned heavily on the Obama-era SCC — including Canada, the state of New York and many major corporations. The Biden review will be influential well beyond the US government6
Economy decisions about when and how much resources to apply to the existential threat of the climate crisis can be debated using analytical tools like the SCC number.
References
1 | David V Wright, “An Important Number You’ve Likely Heard About: Recent Social Cost of Carbon Developments in the United States and Canada” (February 19, 2021), online: ABlawg, http://ablawg.ca/wp-content/uploads/2021/02/Blog_DVW_Social_Cost_Carbon_Update.pdf |
2 | (n.d.). Social Cost of Carbon 101 - Resources for the Future. Retrieved February 20, 2021, from https://www.rff.org/publications/explainers/social-cost-carbon-101/ |
3 | (2017, February 14). Q&A: The social cost of carbon | Carbon Brief. Retrieved February 19, 2021, from https://www.carbonbrief.org/qa-social-cost-carbon |
4 | (2021, January 31). What impact will Joe Biden have on the fight against climate change?. Retrieved February 19, 2021, from https://www.economist.com/the-economist-explains/2021/01/31/what-impact-will-joe-biden-have-on-the-fight-against-climate-change |
5 | (2021, February 19). Decarbonising America - Joe Biden's climate-friendly energy .... Retrieved February 19, 2021, from https://www.economist.com/briefing/2021/02/20/joe-bidens-climate-friendly-energy-revolution |
6 | (2021, February 19). Eight priorities for calculating the social cost of carbon - Nature. Retrieved February 20, 2021, from https://www.nature.com/articles/d41586-021-00441-0 |
