The social cost of carbon (SC-CO2) is an economic metric intended to provide a comprehensive estimate of the net damages—that is, the monetized value of the net impacts, both negative and positive—from the global climate change that results from a small (1 metric ton) increase in carbon dioxide (CO2) emissions. Under Executive Orders regarding regulatory impact analysis and as required by a court ruling, the U.S. government has since 2008 used estimates of the SC-CO2 in federal rulemakings to value the costs and benefits associated with changes in CO2 emissions. In 2010, the Interagency Working Group on the Social Cost of Greenhouse Gases (IWG) developed a methodology for estimating the SC-CO2 across a range of assumptions about future socioeconomic and physical earth systems.
The IWG asked the National Academies of Sciences, Engineering, and Medicine to examine potential approaches, along with their relative merits and challenges, for a comprehensive update to the current methodology. The task was to ensure that the SC-CO2 estimates reflect the best available science, focusing on issues related to the choice of models and damage functions, climate science modeling assumptions, socioeconomic and emissions scenarios, presentation of uncertainty, and discounting.
Integrated assessment models (IAMs) are currently used by the IWG to estimate the economic consequences of CO2 emissions. The IAMs define baseline emission trajectories by projecting future economic growth, population, and technological change. In these IAMs, a 1 metric ton increase in CO2 emissions is added to the baseline emissions trajectory. This emis-
sions increase is translated into an increase in atmospheric CO2 concentrations, which results in an increase in global average temperature. This temperature change, as well as changes in other relevant variables, including CO2 concentrations and income, is translated (either explicitly or implicitly) to physical impacts and monetized damages. These damages include, but are not limited to, market damages, such as changes in net agricultural productivity, energy use, and property damage from increased flood risk, as well as nonmarket damages, such as those to human health and to the services that natural ecosystems provide to society. Because most of the warming caused by an emission of CO2 into the atmosphere persists for well over a millennium, changes in CO2 emissions today may affect economic outcomes for centuries to come. Streams of monetized damages over time are converted into present value terms by discounting. The present value of damages reflects society’s willingness to trade value in the future for value today.
The IWG methodology combines tens of thousands of SC-CO2 results obtained from running three IAMs using five different socioeconomic and emissions projections, a common distribution of equilibrium climate sensitivity (a parameter that characterizes the relationship between CO2 concentrations and long-term global average temperature change), and distributions for other parameters. These results yield three distributions of SC-CO2 values for three different discount rates, from which the IWG calculated an average value for each discount rate. The IWG’s current estimate of the SC-CO2 in the year 2020 for a 3.0 percent discount rate is $42 per metric ton of CO2 emissions in 2007 U.S. dollars. If, for example, a particular regulation was projected to reduce CO2 emissions by 1 million metric tons in 2020, the estimate of the value of its CO2 emissions benefits in 2020 for this SC-CO2 would be $42 million dollars.
The Committee on Assessing Approaches to Updating the Social Cost of Carbon recommends near-term improvements to the existing IWG SC-CO2 estimation methodology, as well as longer-term recommendations for comprehensive updates, and it offers research priorities. Both near- and longer-term recommendations provide guidance to improve the scientific basis, characterization of uncertainty, and transparency of the SC-CO2 estimation framework within the federal regulatory context for which the SC-CO2 was developed.
The committee specifies criteria for future updates to the SC-CO2. It also recommends an integrated modular approach for SC-CO2 estimation to better satisfy the specified criteria and to draw more readily on expertise from the wide range of scientific disciplines relevant to SC-CO2 estimation. Under this approach, each step in SC-CO2 estimation is developed as a module—socioeconomic, climate, damages, and discounting—-
that reflects the state of scientific knowledge in the current, peer-reviewed literature.
Because it is important to update estimates as the science and economic understanding of climate change and its impacts improve over time, the committee recommends that estimates of the SC-CO2 be updated in a three-step process at regular intervals of approximately 5 years. This timing would balance the benefit of incorporating evolving research against the need for a thorough and predictable process.
For each module, the committee recommends near-term changes given the current state of the science. The recommended changes would be feasible to implement in the next 2-3 years and would improve the performance of each part of the analysis with respect to the primary criteria.
- The socioeconomic module should use statistical methods and expert judgment for projecting distributions of economic activity, population growth, and emissions into the future.
- The climate module should use a simple Earth system model that satisfies well-defined diagnostic tests to confirm that it properly captures the relationships between CO2 emissions, atmospheric CO2 concentrations, and global mean surface temperature change and sea level rise.
- The damages module should improve and update existing formulations of climate change damages, make calibrations transparent, present disaggregated results, and address correlation between different formulations. This update should draw on recent scientific literature relating to both empirical estimation and process-based modeling of damages.
- The discounting module should incorporate the relationship between economic growth and discounting. The committee also recommends that the IWG provide guidance on how the SC-CO2 estimates should be combined in regulatory impact analyses with other calculations.
In addition, the committee details longer-term research that could improve each module and incorporate interactions within and feedbacks across modules. These advances will require significant investments in both economic and climate modeling research, particularly research related to the assessment of climate damages and to socioeconomic and emission projections.