[1] The purpose of putting a price on a tonne of emitted CO2 is to aid policymakers or other legislators in evaluating whether a policy designed to curb climate change is justified.
The social cost of carbon is a calculation focused on taking corrective measures on climate change which can be deemed a form of market failure.
[3] The Intergovernmental Panel on Climate Change suggested that a carbon price of $100 per tonne of CO2 could reduce global GHG emissions by at least half the 2019 level by 2030.
Best estimates of the SCC come from integrated assessment models (IAM) which predict the effects of climate change under various scenarios and allow for calculation of monetised damages.
The DICE model defines the SCC to be "equal to the economic impact of a unit of emissions in terms of t-period consumption as a numéraire".
[13] Other popular IAMs used to calculate the social cost of carbon include the Policy Analysis for Greenhouse Effect Model (PAGE) and the Climate Framework for Uncertainty, Negotiation, and Distribution (FUND).
In "The U.S. Government's Social Cost of Carbon Estimates after Their First Two Years: Pathways for Improvement", Kopp and Mignone suggest that these calculation rates do not reflect the multiple ways that humans can respond to climate change.
[18] They propose an alternative approach that should be considered by calculating through a cost-benefit optimization analysis based on if the public "panics" about climate change and implement mitigation policies accordingly.
These rates determine the weight placed on impacts occurring at different times, applying a theoretical model of inter-generational welfare developed by Ramsey.
[19] What discount rate to use is "consequential and contentious"[20] because it defines the relative value of present costs and future damages, an inherently ethical and political judgment.
[22] A 2015 survey of 1,100 economists who had published on climate change found that those who estimated discount rates preferred that they decline over time and that explicit ethical considerations be factored in.
They discuss how incorporating a CPF in SCC can have a long-term effect of less coal usage, an increase in electricity pricing, and more innovation and investment in low-carbon alternatives.
[34] Organizations that take an integrated management approach are using the social cost of carbon to help evaluate investment decisions and guide long-term planning in order to consider the full extent of how their operations impact society and the environment.
Prioritising an IBL approach begins with changing the way we think about traditional financial measurements as these do not take into consideration the full extent of the short and long-term impacts of a decision or action.
Cost-benefit IAM requires more computational resources to provide SCC at the country level, so Ricke et al.[27] calculate the social cost of carbon based on discounted future damage.
Their estimation shows countries that incur large fractions of the global cost consistently include India, China, Saudi Arabia and the United States.
[40] In February 2021 the US government set the social cost of carbon to $51 per tonne, based on a 3% discount rate, but it plans a more thorough review of the issue.
[46] The U.S. government struggled to implement greenhouse gas emission requirements due to the lack of an accurate social cost on carbon to guide policy making.
[46] Due to the varying estimates of the social cost of carbon, in 2009, the Office of Management and Budget (OMB) and the Council of Economic Advisers established the Interagency Working Group on the Social Cost of Greenhouse Gases (IWG) in an attempt to develop standards estimates of SCC for the use of federal agencies considering regulatory policies.
[47] This establishment was formerly named Interagency Working Group on the Social Cost of Carbon, but has now extended to include multiple greenhouse gasses.
The IWG works closely with the National Academies of Sciences, Engineering, and Medicine when researching and creating an up to date report on the SCC.
[48] The Interagency Working Group analyzed and advised that policy surrounding the social cost of carbon must be implemented based on global impacts instead of domestic.
[50] Support for this expansion in scope stems from theories that climate change may lead to global migration and political and environmental destabilization that affects both the national security and economy of the United States, as well as its allies and trading partners.
[15] The social cost of carbon In the United States Government should be seen as a way to continuously update estimates with an end goal of public and scientific approval in order to make efficient environmental policy.
[54] The SCC has been criticised as being extremely uncertain, having to change over time and according to the level of emissions, and is claimed to be useless to policymakers as the Paris Agreement has a goal of 2 °C temperature rise.
Furthermore, economic social cost from carbon was judicially mandated in cost-benefit analysis for new policy in 2008 following a decision by a federal appellate court.