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Revising U.S. estimates of the social cost of carbon

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Written by Marion Davis

Tuesday, 12 July 2011 23:00

The SCC estimate fails to account for uncertainty about catastrophic climate change, among other factors, the authors found.

The U.S. government’s estimate of the social cost of carbon is fundamentally flawed and grossly understates the potential impacts of climate change, a new report by SEI economists shows.

The SCC – a calculation of the damage caused by each additional tonne of carbon dioxide (CO2) emitted into the atmosphere – is a key policy-making factor, used in cost-benefit analyses of everything from power plant regulations to car fuel-efficiency standards.

The U.S. government’s current estimate of the SCC, developed in early 2010 by an interagency group, is $21 per tonne of CO2, or about 21 cents per gallon of gasoline. But a new report by Frank Ackerman and Elizabeth A. Stanton, senior economists in the SEI U.S. Centre, finds that the underlying models are deeply flawed, most notably failing to account for uncertainty about potential catastrophic outcomes.

The peer-reviewed report, Climate Risks and Carbon Prices: Revising the Social Cost of Carbon, released by the Economics for Equity and the Environment Network (E3 Network), shows that if the SCC is recalculated to account for uncertainty and use alternate discount rates, the new values produced can be as high as $893 per tonne in 2010 and $1550 per tonne in 2050.

Implications for policy
The findings, the authors say, raise serious questions about prior analyses of the benefits of reducing emissions and should lead policymakers to rethink what they consider cost-effective.

“The government has been making decisions based on the flawed calculation that carbon dioxide emissions cost just $21 per tonne. In fact, the real cost may be up to forty times that amount,” says Stanton.

Comparing prior research on the cost of reducing emissions with the report’s new findings on the cost of carbon, the report concludes that it is highly likely it is costing the United States more to do nothing about climate change than it would to adopt mitigation measures.

“Now that we know how much we could end up paying to endure the impacts of climate change, investing in reducing our emissions is clearly the prudent option,” says Ackerman.  “It’s the difference between servicing your car, or waiting for it to break down on the highway.”

“E3 Network commissioned this report in response to a critical mass of research by climate and economic experts, all pointing towards what we now know: that the government's estimate of the cost of carbon was a significant underassessment,” adds E3 Network Director Kristen Sheeran. “We hope that those making decisions on U.S. climate change policy will digest this new information and alter their investment approach accordingly.”

Learn more and download the report.

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