The necessity of country-level contributions to the social cost of carbon
The article describes the necessity of including country-level contributions in estimating the global SCC. The researchers do not claim the utility of the country-level SCC in setting up global climate policies since CO2 emissions represent a global externality. However, a more nuanced approach to comprehending the impact of country-level contributions can help better understand the determinants of international cooperation, regional impacts of the country-level SCC that are needed for adaptation and compensation measures, and the effect on the estimates of net global climate damage in concert with its sensitivity to socioeconomic and climate drivers. It is important to note that, in addition to various ways to price carbon, a complimentary mix of policies to accelerate a low-carbon economy is crucial to reduce CO2 emissions and climate damage.
What is the social cost of carbon (SCC)?
The social cost of carbon (SCC) is a commonly used metric of the expected economic damages from carbon dioxide (CO2) emissions. The National Academies of Science (NAS) defines the SCC as a “comprehensive estimate of the net damages... from the global climate change that results from a small (1 metric ton) increase in CO2 emissions" (2017, p.1). Per Executive Order 12866, since 2008, the US has used the SCC as a basis for federal rulemaking related to the valuation of expected costs and benefits associated with changes in CO2 emissions. Since 2010, the US has utilized the SCC estimates provided by the Interagency Working Group (IWG). The IWG uses the following modules to estimate the SCC: socioeconomic, climate, damages, and discounting. The group also utilizes four models: Integrated Assessment Models (IAM), such as 1) the Dynamic Integrated Climate Economy model (DICE), 2) the Framework for Uncertainty Negotiation and Distribution model (FUND), and 3) the Policy Analysis of the Greenhouse Effect model (PAGE) (Nordhaus, 2020).
Drawbacks of the SCC
Although the SCC is an effective policy tool for reducing the carbon budget, it has many limitations. For example, its estimation is complex and uncertain due to the wide range of climate and social interactions integrated into the SCC calculation (Pindyck, 2013). Furthermore, some of the IWG-SCC limitations include 1) constant discount rate, 2) omission of necessary non-market charges or indirect costs, 3) difficulty in estimation of effects of significant temperature changes (larger than 3C), 4) assumption about the lack of impact of severe climate change on the drivers of GDP growth, 5) risk underestimation, 6) omission of ocean acidification, 7) bias in cost-benefit analysis, and 8) omission of co-benefits (public health and the new technologies development) in the reduction of CO2 emissions (Garcia, 2020). Lastly, the global SCC approach disguises the diverse geography of climate change and immense differences in country-level contributions to the estimation of the global SCC, in addition to socioeconomic and climate uncertainties, which are more significant at the regional level (Ricke et al., 2018).
Even though the global SCC is the correct value to use from the worldwide welfare perspective (due to its capture of the externality of CO2 emissions), the country-level contributions to SCC estimation are vital for several reasons. First, charting domestic impacts can help quantify non-cooperative behavior to better understand the factors of international cooperation. Such an analysis can be helpful for the governance of climate agreements, which is an essential issue for climate change. The nationally determined structure of the Paris Agreement and its vulnerability to fickle national interests is one of the critical examples where determining such factors may be necessary for policymakers. Second, country-level contributions to the global SCC can also help better comprehend regional impacts, essential for deciding adaptation and compensation measures. Lastly, a higher spatial resolution estimation of climate costs and benefits may also affect the approximation of net global climate damage and its sensitivity to socioeconomic and climate drivers. Therefore, upon drawing on contemporary economic and physical climate science results, researchers propose the estimation of country-level SCC and aggregate global SCC while quantifying the associated uncertainties (Ricke et al., 2018).
Benefits of estimating country-level contributions to the SCC
Here are the economic benefits of the proposed solution. First, the country-level SCC estimates the marginal economic damage (or, if harmful, the benefit) that is anticipated to happen in a country due to additional CO2 emissions. Although the country-level SCC’s marginal impacts do not seize all the information related to climate decision-making, the country-level SCC distribution offers valuable insights into the distributional effects of climate change and national strategic incentives. Second, the global SCC is the aggregation of country-level SCCs. To find the country-level SCCs and global SCC, the researchers (Ricke et al.) used the same module structure as the IAMs, with additional modifications. Instead of building reduced-form economic and climate models, the researchers used country-level climate projections from simulation data and country-level economic damage relationships/estimations from the empirical macroeconomic analyses. The socioeconomic/discounting uncertainties were evaluated using 12 discounting schemes and 5 socioeconomic scenarios (Ricke et al., 2018).
For instance, the researchers calculated the median global SCC of $417 per tCO2 and an unequally distributed country-level SCC. The relative ranking of countries yielded the following results: countries that sustain large fractions of the global SCC include India ($86 per tCO2; 21% of global SCC), the US ($48 per tCO2; 11% of global SCC), Saudi Arabia ($47 per tCO2; 11% of global SCC); Brazil ($24 per tCO2); China ($24 per tCO2), and the United Arab Emirates ($24; per tCO2). Canada, the Former Soviet Union, and Northern Europe had negative country-level SCC since their current temperatures were below the economic optimum (Ricke et al., 2018).
The proposed solution also has environmental and social benefits. As mentioned above, including country-level contributions to the SCC provides a better estimation of the economic damages related to the change in CO2 emissions. Therefore, the environmental benefit of the proposed solution includes the possibility of better-tailored corrective measures on climate change on national and global levels. For instance, the researchers claim that if countries were to price their CO2 emissions at their domestic SCCs, approximately 5% of the global climate externality would be internalized. Also, fully internalizing the CO2 externality, such as pricing carbon emissions at the global aggregate SCC, would help meet the Paris Agreement goals (Ricke et al., 2018).
Moreover, this solution highlights the high values and deep inequalities in the country-level estimates of the SCC. Therefore, the social benefit of the necessity of country-level contributions to the SCC is the emphasis on multilateral action towards climate change while devising policies that align national interests with global ones. Eventually, multilateral efforts to reduce CO2 emissions can help with issues related to public health, future food security, and restoration of life on land and in the oceans, among others.
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About the author
Dr. Venera N. Anderson is a global strategy advisor on sustainability and climate issues. She creates and implements innovative solutions that address the world’s most pressing issues, such as climate change, economic development, and humanitarian challenges. She is a member of the Harvard Business Review Advisory Council. Venera is a co-author of the "Touching Hydrogen Future" book (2nd edition). She is also an International Expert at Women in Green Hydrogen, a global network which strives to increase the visibility and amplify the voices of women working in the green hydrogen sector, and a Speaker at Tech Up for Women and the Wall Street Green Summit about her vision for coastal U.S. green hydrogen hubs.