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Carbon Pricing

Published on January 16th, 2015 | by Silvio Marcacci


The Social Cost of Carbon Is Six Times Higher Than Estimated

January 16th, 2015 by  

What if the social cost of carbon – a calculation of economic damage caused by carbon dioxide emissions used as the foundation of American climate policy assessments – was wrong? And not just “oops-I-forgot-a-decimal-point” wrong, but “ruin-your-national-economy” wrong?

Unfortunately, according to a new study from Stanford University scientists, the price tag for the ever-growing amount of CO2 humanity is spewing into the air is six times higher than previously estimated by the U.S. government.

factory emissions

If true, this higher social cost of carbon has major implications for emissions policy. Not only do the grim economic projections of climate change impacts become much worse in developed nations, they may leave some developing countries unable to sustain economic growth.

A Trillion-Dollar Economic Threat to America?

Economic evaluation of U.S. federal climate policies has hinged on a social cost of carbon estimate since it was first defined in 2010 and subsequently updated to $37 per metric ton of CO2 in 2013. The social cost of carbon estimates monetized damages from climate-related impacts like decreased agricultural production, human health, and flood damages, among others.

Unfortunately, $37 seems like a dangerously low estimate. Each metric ton of carbon dioxide emitted into the atmosphere causes $220 in economic damages, say the Stanford researchers. If that seems like a manageable cost, add in context from overall U.S. emissions and a staggering economic threat takes shape.

In 2013, American energy sector CO2 emissions rose 2.5%, totaling 5,396 million metric tons. If the Stanford research is applied, America may face a price tag of well over $1 trillion dollars annually just from generating power, not to mention transportation or manufacturing-related emissions. Considering America’s gross domestic product (GDP) was $16.7 trillion in 2013, our carbon costs are significant, to say the least.

Higher Costs Over Time, Higher Social Cost of Carbon

So how have we gotten the social cost of carbon so wrong? Inaccurate economic modeling, in essence, say the Stanford researchers. America’s social cost of carbon (as well as those in Germany, the United Kingdom, Canada, and others) is based on an integrated assessment model (IAM). IAMs combine myriad inputs to assign costs and benefits to certain actions (in this case cutting emissions), but IAMs assume climate change costs are felt immediately without permanent damage to GDP, and fail to add up how climate change and associated economic impacts add up over time.

The Stanford study arrived at a $220 social cost of carbon by allowing climate change to impact an economy’s development as a certain amount of money is spent adapting to rising seas, hotter temperatures, and stronger storms. “For 20 years now, the models have assumed climate change can’t affect the basic growth rate of the economy,” said Stanford’s Frances Moore, a study co-author. “If climate change affects not only a country’s economic output but also its growth, than that has a permanent effect that accumulates over time, leading to a much higher social cost of carbon.”

Put another way, with every extreme weather event caused by climate change, more money must go toward rebuilding or recovering, limiting money available for investment and gradually eroding capital infrastructure like roads and buildings. Sure, New York and New Jersey recovered from Hurricane Sandy, but every dollar funding climate resiliency and repair is one less spent on existing needs, and every day a worker couldn’t work because their business was closed or home destroyed was one less day to generate income.

Developing Nations to Bear Brunt of Economic Damages

These “climate shocks” are a drag on developed countries, but can be devastating in developing nations without financial reserves where economic activity hinges on agriculture and physical labor. Typhoon Haiyan, for instance, ravaged the Philippines in 2013 with damage estimated around $14 billion and just $2 billion covered by insurance. Recovery in the Philippines will certainly take longer than in New York City.

But even if major events like hurricanes or floods are ignored, rising temperatures will harm economic output – a 2013 study estimated heat stress reduces labor capacity 10 percent now, and could cut labor productivity 20 percent by 2050 in places like India, the Middle East, Southeast Asia, and the Caribbean.

The Stanford research flushed these different economic impacts out by dividing their model into two regions, to represent high and low-income countries, and the results don’t bode well for developing nations. Using the impacts over time + adaptation spending, developed economies lose 12% of GDP by 2100, but developing economies fare much worse. “Average annual growth rate in poor regions is cut from 3.2% to 2.6%, which means by 2100 per-capita GDP is 40% below reference.”

Silver Lining: Decarbonization Becomes A Bargain

If there’s a silver lining to this story, it lies in the  economic modeling used to evaluate climate policies. For instance, the U.S. Environmental Protection Agency’s proposed emissions reduction regulations are affordable with a $37 social cost of carbon, but more expensive mitigation and adaptation measures would become eminently affordable if that number was adjusted to accurately reflect higher costs.

At $220 a ton, rapid decarbonization becomes a bargain for global economies. “Until now it’s been very difficult to justify aggressive and potentially expensive mitigation measures because the damages just aren’t large enough,” said Moore. Indeed, under Stanford’s outlook, emissions would need to drop to nearly zero by 2030 to avoid dangerous economic damage.

The Clinton Global Initiative recognized the potential for portable solar power to aid Pakistan's flood victims

This goal is nearly impossible given current political outlooks, but it means renewables like wind and solar beat every fossil fuel on cost while expensive adaptation measures like sea walls become realistic. The authors also note every dollar increase in GDP means another dollar to potentially invest in mitigation or adaptation measures, meaning even partially reducing emissions can help reduce economic impacts.

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About the Author

Silvio is Principal at Marcacci Communications, a full-service clean energy and climate policy public relations company based in Oakland, CA.

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