Thursday, January 27, 2011

On the Social Cost of Carbon

Today's The Daily Climate (here) asks whether the federal government's official valuation of the Social Cost of Carbon (SCC) is too low. It's a good question, and the article cites a number a couple of prominent economists, William Nordhaus and Marty Weitzman, as well as an obscure law professor.

Last year, the federal government established a SCC of $21/ton (see here). This number is to be used in all regulatory impact analyses and environmental impact statements prepared by Executive Branch agencies.

Is it the right number? No one knows. Different  models of climate change reach different conclusions about the damage function and, hence, the value of the SCC. One thing we can say with certainty is that the federal government's new $21/ton figure is much better than its previous SCC, which was, zero. The $21/ton figure is fairly close to the $23/ton mean estimate Richard Tol derived in his 2007 meta-analysis of climate studies (freely dowloadable here). And even if one believes the federal government should have picked a higher number, instituting an SCC - any SCC -  is the single most important step the federal government has yet taken towards a functioning climate policy (though, admittedly, that's not saying much).

How important is the SCC? As The Daily Climate article makes clear, I don't believe setting a precise value on the SCC is nearly as important as getting institutions in place to start actually moving greenhouse gas emissions in the right direction. The entire history of environmental policy, as well as practical political realities, suggest that the risk of over-spending on climate change in the near term is quite small. I was particularly glad to read in the article that William Nordhaus seems to agree with me about that. He's quoted as saying "While there is debate about whether the 'right' number for a carbon price is $10, $20 or $100, the global average today is close to $1 and moving nowhere.... So we have a long, long way to go before we even enter the range of debate."

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