Estimating the Social Cost of Carbon Under Rosy Scenarios: Setting Ourselves Up for Disaster?

Recent updates to the social cost of carbon (SCC) represent significant increases in value at all discount rates. (See chart below.) Yet, many scientists, as noted in the April 2014 Nature article, suggest that the costs may be larger than even the new estimates suggest. Their reasoning is primarily that the Integrated Assessment Models (IAMs) undervalue or do not account for some negative impacts. Revesz et al. cite social unrest and disruptions to economic growth as two pertinent examples.

Marginal Cost of Emissions in 2020

5.0% 3.0% 2.5% 95th
Original $7 $26 $42 $81
New $12 $43 $65 $129

Discount rates have also been a point of contention in valuing the cost of carbon. For example, Nicholas Stern’s famous 2006 report used a discount rate of 1.4%. The U.S. worst-case scenario, 2.5%, is not close to Stern’s estimate. Applying 1.4% to the IAMs used by the U.S. would find much higher values for the SCC. Lower discount rates also produce distributions that are skewed further to the right and have fatter tails. Thus, not only do low discount rates produce higher SCC values, there is also a greater chance of experiencing an outcome in the far tail of the distribution. Essentially, this characteristic means the chance of a very bad outcome (extremely high social cost of carbon) has increased.

Assuming that the models are not comprehensive and that high discount rates are inaccurate, policy makers are 1) undervaluing the present value of climate pollution and 2) underestimating the possibility of bad outcomes. Thus, even if the current SCC estimates are fully integrated into policy decisions, the U.S. will still be underprepared for the economic consequences of climate change.

It is possible that SCC policy could catch up to scientific and economic input as the models are refined and the effects of climate change become more apparent in coming decades. However, one last exacerbating point to consider is that many climate scientists have stated that predicted changes (like sea ice loss) are happening even quicker than they had expected. In order to compensate for this shortened time frame, policy makers will also have to speed up the pace of adopting new climate related legislation. Given the experience of the last 10 years, the outlook doesn’t look too rosy. — N. R.