New Paper: ‘Private Benefit Of Carbon Is Much Higher Than Social Cost Of Carbon’

  • Date: 06/06/17
  • Richard S.J. Tol, University of Sussex

Abstract: The private benefit of carbon is the value, at the margin, of the energy services provided by the use of fossil fuels. It is the weighted average of the price of energy times the carbon dioxide emission coefficient, with energy used as weights. The private benefits is here estimated, for the first time, at $411/tCO2. The private benefit is lowest for coal use in industry and highest for residential electricity; it is lowest in Kazakhstan and highest in Norway. The private benefit of carbon is much higher than the social cost of carbon.

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Results

These calculations show that the private benefit of carbon is lowest for coal use in industry: $38-65/tCO2. It is highest for residential electricity use: $1,877/tCO2. The private benefit of carbon is lowest in Kazakhstan: $48-67/tCO2. It is highest in Norway $6,241-6,277/tCO2. The global average is $382-440/tCO2 or $1,402-1,621/tC.

There have been many estimates of the social cost of carbon. The mean of published estimates is $12/tCO2 for studies that use a 3% pure rate of time preference, and $98/tCO2 for studies that use a 1% pure rate of time preference (Tol, 2015). This is low compared to the private benefits estimated above. Figure 1 shows the cumulative histogram, by user, fuel and country, of the private benefit of carbon, weighted as above by fuel use. The private benefit of 0.6% of fossil energy use is less than the lower estimate of the social cost of carbon. For the higher estimate, 9.8% has a private benefit that is lower than its social cost. In other words, 0.6% or 9.8% of fossil energy use destroys more value than it adds. More than 90% of fossil energy use adds more value than it destroys.

There is an alternative interpretation to Figure 1. If a carbon tax is imposed equal to the lower estimate of the social cost of carbon, 0.6% of end-use energy prices would more than double. Other energy prices would rise less. If pre-announced and phased in, such a price rise would have only a modest economic impact (Clarke et al., 2014, Weyant, 1993). On the other hand, for the higher estimate of the social cost of carbon, 9.8% of energy prices would more than double. The CDF shown in Figure 1 also implies 36.8% would see an increase of more than 50% if the higher estimate of the social cost of carbon would be imposed as a carbon tax, and 88.1% a price rise of more than 20%. If such a carbon tax would be imposed, energy use would fall and the private benefit of carbon would rise.

In the middle of February 2017, the price of CO2 emission permits was $5.20/tCO2 in the EU Emissions Trading System and $13.51/tCO2 in California, while CDM Certified Emission Credits traded at $0.30/tCO2. The clearing price in the latest RGGI auction in December 2016 was $3.55/tCO2. These carbon prices have a modest impact on the majority of energy prices.

Full paper

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