PRICING CARBON, MISPRICING CLIMATE?

The Social Cost of Carbon seeks to price climate damage, but its assumptions make it a shaky guide for policy

- KRISHNA GUPTA

In the previous article, we discussed the importance of the Social Discount Rate (SDR) in guiding various policies to address the challenges of climate change. Closely related to the SDR is the concept of Social Cost of Carbon (SCC), which is basically putting a number to the damage caused by increased carbon in the air. The SCC is important because it has been used by policymakers to evaluate projects and take mitigation and adaptation measures to address climate change. Let us discuss SCC in more detail.

WHAT IS SCC?

The SCC is a marginal cost concept and is basically the damage caused by the emission of one ton of carbon dioxide in one year. The SCC is therefore an important component of any cost-benefit analysis of carbon emissions.

While the idea of social costs and externalities has been around in Public and Welfare economics for a long time, the social cost of carbon entered the Economists' lexicon with the work of William Nordhaus. More specifically, the social cost of carbon was the cost incurred as a result of one ton of carbon dioxide. This SCC was typically an output from the various Integrated Assessment Models (IAMs), which are nothing but macroeconomic models, incorporating greenhouse gas emissions and their impact.