The Social Cost of Carbon (SCC) is the cost of the damages incurred by the emission of one additional metric ton (mt) of CO2. For example, when emitted from car exhaust, CO2 remains in the atmosphere for a long period of time and causes warming, which in turn affects human health and the environment in a number of complex and interrelated ways.
Currently, the U.S. federal government uses $51 per mt of CO2 as the SSC in its economic analyses. You can think of the SSC as a benefit – preventing damage – from reducing CO2 emissions. Seen this way, the SCC helps to weigh the benefits of climate mitigation against the costs of doing so.
Calculating the SCC is by no means simple. CO2 emissions alter the climate, and these changes affect economic outcomes in myriad and complex ways – shifts in agricultural productivity, damage caused by sea level rise, and declines in human health and labor productivity, among many others. The SCC is controversial. There are many assumptions, climate effects change over time, some potential costs (wars, for instance) are unforeseen, and the future has to be taken into account (discounted at a rate back to the present).
A Little History
1981: The Reagan Administration introduces cost-benefit analyses for federal government regulations. These analyses have been in place ever since. Climate impacts were, however, not included.
2007-2008: The Center for Biological Diversity (CBD) sues the federal government over the new fuel economy standards arguing that the proposed regulations don’t account for the future costs of climate impacts. The CBD won in 2008 and, from then on, federal agencies are required to account for the cumulative impacts of greenhouse gas emissions in cost-benefit analyses.
2010: The Obama administration establishes the Inter-agency Working Group (IWG) to provide a scientifically sound rationale for the SCC. The IWG sets the SCC at $43 per mt CO2 for use on a government-wide basis.
2017: The Trump administration disbands the IWG and sets the SSC at $3 to $5 per mt CO2, depending on the industry and type of emission. At this price, many greenhouse gas emission regulations are not economically viable – opening the door for the rollback of important environmental regulations, such as fuel economy standards.
2021: The Biden administration re-established the IWG, which after review, set the SSC at $51 per mt CO2 – its current value. This is essentially the same number as during the Obama years taking inflation into account. This SSC will increase to $85 per mt CO2 in 2050.
What ithe Social Cost of Carbon is Essential
The SCC accounts for the climate benefits of proposed policies, such as expanding a city’s public transit system, adopting new regulations for appliances, emission standards for air pollutants, and performance standards for solid waste incinerators, for instance.
Without using the SCC, the ongoing benefits of avoided CO2 emissions might be missed in the analysis of other costs and benefits.
A simple example: New regulations are being proposed for new energy-efficient water heaters. The total costs of the regulations are estimated at $40 million and reduce CO2 emissions by 1 million mts over the lifetime of the fleet of water heaters. At an SSC of $51 per mt CO2, then the benefit of the avoided CO2 emissions is $51 million – larger than the costs of the regulations by $11 million, so the policy is justified.
For a more in-depth explanation of how one uses the SCC in policy analysis, watch RFF’s Video Explainer: Social Cost of Carbon 101.
Social Cost of Carbon -- New Estimates Coming
Much work is already underway to make the SSC more representative of recent advances documented in the scientific and economic literature. UC Berkeley and Resources for the Future (RFF) published a study in Nature on September 1, 2022, that estimates the SCC at $185 per mt CO2. This is 3.6 times the current U.S. government’s value of $51 per mt CO2.
“The implication is that the benefits of government policies and other actions that reduce global warming pollution are greater than has been assumed,” said RFF President Richard G. Newell, who co-authored the study.
The U.S. EPA, on November 11, 2022, proposed a rule to regulate emissions of methane from the oil and gas industry. In this rule proposal, the U.S. EPA introduced a new approach to estimating the SCC. Their new estimate for the SCC is $190 per mt CO2 which is very similar to the one estimated by UC Berkeley and RFF. (Both at a discount rate of 2% – taking into account future costs and benefits).
With better estimates of the SCC, government agencies can improve their accounting of the true cost of emitting carbon dioxide and the benefits of reducing these emissions. A higher social cost of carbon indicates that reducing greenhouse gas emissions is likely to reap greater social and economic benefits than previously estimated.
This could be used to justify more stringent climate policies throughout the policy-making processes on fuel economy, energy efficiency, power plant emissions, new pipeline development, and many others.
In addition, information about higher social costs of carbon can be conveyed to consumers, encouraging them to buy more energy-efficient products. They will save money by lowering their energy bills while reducing greenhouse gas emissions.
It’s time we applied the SCC to all of our investments: let’s be fair to future generations by accurately assessing the benefits and costs of investments today.
