Why Climate Change Policy Ignores the Real Social Cost of Carbon

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Stanford, CA—In making decisions about how to address climate change, policy makers routinely perform a cost-benefit analysis that pits the costs of going green against the expected economic damage of climate change. New research out of Stanford paints a picture where the numbers being used in these decisions are far out of touch with reality. The consequence is that global climate change policies may end up being far less aggressive and ambitious than they need to be.

The social cost of carbon (SCC) is a measure of the impact, in dollars and cents, that carbon emissions have on social welfare. According to this new analysis by researchers Frances Moore and Delavane Diaz, the true SCC for one ton of carbon emitted in 2015 could be as high as $220, many times higher than the $37 figure that has been in use recently by the U.S. government.

This large gap is the result of using different climate change mitigation models. The one used in this analysis takes into account the negative impact climate change is likely to have on total factor productivity (TFP) growth. Specifically, it includes in its calculations factors like the potential impact of severe weather events. It also factors in the diversion of funds and resources away from research and development and toward dealing with climate threats. For various reasons, including the fact that their economies are more impacted by temperature due to reliance on agriculture, economic growth in poor countries is projected to be hit harder than in rich countries.

The flawed assumption of other climate change models is that global warming will not significantly impact economic growth over time. Taking this possibility into account makes it much easier to come to the conclusion that urgent action is needed. It is economically justified, according to the Stanford report, to adopt policies that will keep the rise of global temperatures to two degrees Celsius above pre-industrial levels, a commonly cited threshold for major damage from global warming.

The impact of all this hypothetical modeling is real. The Environmental Protection Agency has used a $37 SCC in drawing up its greenhouse gas regulations, and it got this figure by averaging three other climate change mitigation models. Countries including Canada, Mexico, the United Kingdom, France, Germany and Norway have also used these models to inform energy policy.

In a statement on the study, Diaz said, “If the SCC is higher, many more mitigation measures will pass a cost-benefit analysis. Because carbon emissions are so harmful to society, even costly means of reducing emissions would be worthwhile.”

Published in WholeFoods Magazine, March 2015