Carbon Pricing 3. The Social Cost of Carbon
The price of emissions should reflect the cost of the damages they cause
The Polluter Pays Principle
Carbon prices should reflect the cost of damages from climate change Called the Social Cost of Carbon
Additional Cost of Additional Additional Climate Additional Emissions Damage Change Damage Present cost of additional damage
Additional Emissions Emissions Cost of Additional Damages Cost of damages with additional emissions Cost of damages without additional emissions Cost of damages Time
Social Cost of Carbon at a 3% discount rate (US EPA estimates from 2015)
Uncertain and omitted costs Uncertainties about extent of damages and their costs • Omits important costs • Effect of large climate changes Damage estimates do not capture effects of large changes • GDP growth assumed exogenous • Conventional economic costs not necessarily valid • Exclusion of difficult to model risks • Non-marginal damages • Technical issues Assumed starting point • Discount rate • Exclusion of co-benefits •
The Social Cost of Carbon is a useful reference point: Modelling likely understates true cost • Best used with other indicators • Useful for identifying cost effective actions (ruling things in), less useful • for identifying measures which are too costly (ruling things out) Never a complete guide to action •
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