The Social Cost of Carbon

  • Date: 17/12/16
  • Dr John Constable: GWPF Energy Editor

The Social Cost of Carbon (SCC) is the single most important tool in evaluating the effectiveness of climate change mitigation policies, such as subsidies to renewables. However, the UK government has quietly ceased to use this measurement, almost certainly because after a decade of subsidy the policy cost per tonne saved is still greatly in excess of even higher estimates of SCC. The ‘solution’ is worse than the problem. The Trump administration is likely to focus on the Social Cost of Carbon in its reforms, probably introducing more reasonable and lower estimates, increasing pressure on the UK government amongst others to re-examine their climate policies.

Amongst those favouring the current global climate policy agenda there is some anxiety that Mr Trump’s appointees to the Federal Government’s Environmental Protection Agency (EPA) will insist on revisions to the estimates Social Cost of Carbon (SCC), that is to the monetized estimates of the harm to human interests incurred by the emission of a specified quantity of carbon dioxide, usually a tonne, at a particular time.

The EPA’s current estimates are presented for a variety of discount rates, and one figure to indicate the high end of the range, the 95th percentile.

The EPA estimates that in 2015 the Social Cost of Carbon ranged between $11/tCO2 to $56/tCO2, depending on discount rate, and the high end of the range was $105/tCO2. In 2030 the EPA’s figures range from $16 to $73 per tonne, with a high end of $152 per tonne.

Estimating future harms in this way is obviously difficult and even in the best of hands will be prone to error. The breadth of the central range, $11 to $56 per tonne tells you all you need to know. The numbers come with a health warning.

Nevertheless it is obvious that economists will wish attempt this calculation since it gives them some means of evaluating the emissions savings costs of current policies. An abatement cost that is higher than the Social Cost of Carbon is more harmful than the climate change caused by the emission of that saved tonne. In other words, it would be entirely rational to prefer the climate change to the cost of emissions saving. It is axiomatic that policy abatement costs must be below the Social Cost of Carbon, and ideally well below so that there is no doubt that the policy is preferable to climate change itself.

However, it is a curious fact that while specialist authorities such as Professor Hope of the Judge Business School at Cambridge is concerned that Mr Trump’s administration may revise the EPA’s estimates downwards, there is in fact very little discussion of Social Cost of Carbon in general climate policy debate. Indeed, the UK’s Department of Business, Energy and Industrial Strategy (BEIS) has simply stopped talking about it. The Department’s web page admits the fact:

Carbon valuation for policy appraisal no longer uses the social cost of carbon.

The Department then, bizarrely, goes on to note the importance of SCC rather than explaining why it has been dropped.

“The SCC matters because it signals what society should, in theory, be willing to pay now to avoid the future damage caused by incremental carbon emissions.”

Quibbles about the use of the word of ‘society’ in this context aside, that is correct, so why did the UK government decide to abandon the use of SCC, and why has there been so little progress with its replacement, the Shadow Price of Carbon?

Even reference to the Treasury’s Green Book, the core reference for policy appraisal guidance, contains only vague references to SCC, and via a footnote sends the reader on further hunt for a Government Economic Service paper on Estimating the Social Cost of Carbon Emissions. This can, with a little work, be found in the National Archives. It dates from 2002.

Even a sympathetic observer would have to conclude that the UK Government’s work on the Social Cost of Carbon, or putative replacement, is half-hearted, dated and extremely confusing. Why have they lost interest?

The answer is that even conservative and approximate estimates of policy abatement costs are vastly in excess of any rational estimate of Social Cost of Carbon.

For example, using the UK’s grid average emissions factor we can provide a rough approximation to the displacement of emissions through the generation of a MWh of renewable energy. The emission factor in the UK electricity system has fallen very significantly over the last decade because of the retirement of older coal generation stations. In 2009 the grid average emissions factor stood at 0.45 tonnes per MWh, while in in 2015 it was only 0.33 tonnes per MWh.

Thus by calculating the subsidy paid to a generator we can estimate the cost per tonne abated. It should be noted that this results in a conservative cost estimate since it would not include the system costs imposed by uncontrollably variable generators such as wind and solar.

UK onshore wind is subsidised under the Renewables Obligation at just over £40/MWh, and offshore wind at double that amount. At an emissions factor of 0.33 tonnes per MWh onshore wind power in the UK has a subsidy abatement cost of about £121 ($150) a tonne, and offshore of £242 ($300) a tonne.

These costs exceed even the high-end figures estimated by the US EPA, and are many times the central figures. Clearly the UK’s policies are not cost-effective. Indeed, they are actually substantially more harmful to human wellbeing than the problem they claim to address. This is almost certainly not an isolated case; it would be interesting to know whether any policies, national or global, urged in the name of climate change mitigation actually have abatement costs below the Social Cost of Carbon, even at the current and perhaps exaggerated levels suggested by the Environmental Protection Agency.

The rumours that Mr Trump’s administration will put the EPA’s SCC calculations under intensive scrutiny is clearly important. – Have they, for example, made reasonable allowance for the benefits of rising carbon dioxide levels, of the kind highlighted by Matt Ridley in his GWPF lecture.

Perhaps even more important is that the reformed EPA reviews the abatement costs of all its policies in the light of the SCC estimates. And while they are about it, perhaps they would have time to look at the United Kingdom’s policies too. An objective view would be very welcome.