The role of the social cost of carbon in policy

Focus Article

Steven K. Rose

Published Online: Mar 07 2012

DOI: 10.1002/wcc.163

Full article on Wiley Online Library: HTML PDF

Can't access this content? Tell your librarian.

Abstract Estimates of the marginal value of carbon dioxide—the social cost of carbon (SCC)—were recently adopted by both the U.S. and U.K. Governments in order to satisfy requirements to value estimated greenhouse gas (GHG) changes of new federal regulations. However, the development and use of SCC estimates comes with significant challenges and controversial decisions. This paper summarizes the key issues and then derives guidance for developing, selecting, and applying the estimates that follows from the fundamental scientific nature and economic principles associated with GHGs and climate change, as well as an understanding of the state of the art for estimating the SCC. The paper evaluates recent estimates in light of the guidance and finds the estimates inconsistent with the guidance in a number of significant areas. The paper also differentiates SCC policy applications in terms of policies with incremental versus nonincremental implications for global GHGs, and identifies serious issues for application of the SCC in setting and evaluating climate policy targets. WIREs Clim Change 2012, 3:163–195. doi: 10.1002/wcc.163 This article is categorized under: Climate Economics > Aggregation Techniques for Impacts and Mitigation Costs

Probability distribution functions for published global social cost of carbon estimates—peer reviewed, gray literature, and all (2006$/tCO₂ for ca 1995 emissions). Source: Tol,2 Fisher–Tippett distributions adjusted to 2006$.

[ Normal View | Magnified View ]

References

Center for Biological Diversity vs. National Highway Traffic Safety Administration, United States Court of Appeals for the Ninth Circuit, No. 06‐71891, November 15, 2007.
Tol, RSJ. The social cost of carbon: trends, outliers and catastrophes. Economics: The Open‐Access, Open‐Assessment E‐Journal, No. 2008‐25, August 12, 2008. Available at: http://www.economics‐ejournal.org/economics/journalarticles/2008‐25. (Accessed February 25, 2012).
U.S. DOE (United States Department of Energy). Department of Energy, 10 CFR Part 431 Energy Conservation Program: Energy Conservation Standards for Small Electric Motors; Final Rule. Federal Register, Vol. 75, No. 45, March 9, 2010, 10874–10948.
U.S. Government Interagency Working Group. Interagency Working Group on Social Cost of Carbon, U.S. Government. Appendix 15A. Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866,` Issued with U.S. DOE small electric motors rule, March 2010. Available at: www.regulations.gov. (Accessed February 4, 2012).
Watkiss, P, Hope, C. Using the social cost of carbon in regulatory deliberations. WIREs Clim Change 2011, 2:886–901. doi:10.1002/wcc.140.
U.S. EPA–U.S. NHTSA. Environmental Protection Agency, 40 CFR Parts 85, 86, and 600, Department of Transportation National Highway Traffic Safety Administration, 49 CFR Parts 531, 533, 536, 537 and 538, Light‐Duty Vehicle Greenhouse Gas Emission Standards and Corporate Average Fuel Economy Standards; Final Rule. Federal Register, Vol. 75, No. 88, May 7, 2010, 25324–25728.
U.S. EPA–U.S. NHTSA. Environmental Protection Agency, 40 CFR Parts 86 and 600, Department of Transportation National Highway Traffic Safety Administration, 49 CFR Parts 531, 533, 537, Proposed Rulemaking To Establish Light‐Duty Vehicle Greenhouse Gas Emission Standards and Corporate Average Fuel Economy Standards; Proposed Rule. Federal Register, Vol. 74, No. 186, September 28, 2009, 49454–49789.
U.S. DOE (United States Department of Energy). Department of Energy, 10 CFR Part 431 Energy Conservation Program: Energy Conservation Standards for Refrigerated Bottled or Canned Beverage Vending Machines; Final Rule. Federal Register, Vol. 74, No. 167, August 31, 2009, 44914–44968.
U.S. EPA (United States Environmental Protection Agency). Environmental Protection Agency, 40 CFR Part 80, Regulation of Fuels and Fuel Additives: Changes to Renewable Fuel Standard Program; Proposed Rule. Federal Register, Vol. 74, No. 99, May 26, 2009, 24904–25143.
U.S. EPA (United States Environmental Protection Agency). Draft Regulatory Impact Analysis: Changes to Renewable Fuel Standard Program, Assessment and Standards Division Office of Transportation and Air Quality U.S. Environmental Protection Agency, 2009. Available at: http://www.epa.gov/otaq/fuels/renewablefuels/regulations.htm. (Accessed February 25, 2012).
U.S. NHTSA (United States Department of Transportation National Highway Traffic Safety Administration). 49 CFR Parts 523, 531, 533, 534, 536 and 537, Average Fuel Economy Standards Passenger Cars and Light Trucks Model Year 2011; Final Rule. Federal Register, Vol. 74, No. 59, March 30, 2009, 14196–14444.
U.S. EPA (United States Environmental Protection Agency). Environmental Protection Agency, Advanced Notice of Proposed Rulemaking (ANPR): Regulating Greenhouse Gas Emissions under the Clean Air Act, 2008. Available at: http://www.epa.gov/climatechange/anpr.html. (Accessed February 25, 2012).
U.S. EPA (United States Environmental Protection Agency). Technical Support Document on Benefits of Reducing GHG Emissions, June 12, 2008, for U.S. EPA Advanced Notice of Proposed Rulemaking (ANPR): Regulating Greenhouse Gas Emissions under the Clean Air Act, 2008. Available at: www.regulations.gov. (Accessed February 4, 2012).
U.S. DOE (United States Department of Energy). Department of Energy, 10 CFR Parts 430, Energy Conservation Program: Energy Conservation Standards for Certain Consumer Products (Dishwashers, Dehumidifiers, Electric and Gas Kitchen Ranges and Ovens, and Microwave Ovens) and for Certain Commercial and Industrial Equipment (Commercial Clothes Washers), Final Rule. Federal Register, Vol. 74, No. 66, April 8, 2008, 16040–16096.
U.S. DOE (United States Department of Energy). Department of Energy, 10 CFR Part 431, Energy Conservation Program for Commercial and Industrial Equipment: Packaged Terminal Air Conditioner and Packaged Terminal Heat Pump Energy Conservation Standards: Final Rule. Federal Register, October 7, 2008, 58813–58814.
U.S. NHTSA (United States Department of Transportation National Highway Traffic Safety Administration). 49 CFR Parts 523, 531, 533, 534, 536 and 537, Average Fuel Economy Standards, Passenger Cars and Light Trucks; Model Years 2011–2015; Proposed Rule. Federal Register, Vol. 73, No. 86, May 2, 2008, 24352–24487.
Defra (U.K. Department for Environment Food and Rural Affairs). The Social Cost of Carbon and the Shadow Price of Carbon: What They are, and How to Use Them in Economic Appraisal in the UK. Economics Group, Defra, December 2007. Available at: http://archive.defra.gov.uk/evidence/series/documents/shadowpriceofcarbondec‐0712.pdf. (Accessed February 25, 2012).
Clarkson, R, Deyes, K. Estimating the social cost of carbon emissions. Department for Environment Food and Rural Affairs (DEFRA), Working Paper 140, 2002.
U.S. EPA–U.S. NHTSA. Environmental Protection Agency, 40 CFR Parts 85, 86, and 600, Department of Transportation National Highway Traffic Safety Administration, 49 CFR Parts 531, 533, 536, and 537, 2017 and Later Model Year Light‐Duty Vehicle Greenhouse Gas Emissions and Corporate Average Fuel Economy Standards; Proposed Rule. Federal Register, Vol. 76, No. 231, December 1, 2011, 74854–75420.
IPCC WGI. Climate Change 2007—The Physical Science Basis Contribution of Working Group I to the Fourth Assessment Report of the IPCC, 2007.
Rose, SK. Federal decision‐making on the uncertain impacts of climate change: incremental vs. non‐incremental climate decisions. In: Gulledge, J, Richardson, LJ, Adkins, L, and Seidel, S, eds. Assessing the Benefits of Avoided Climate Change: Cost‐Benefit Analysis and Beyond. Washington, DC: Pew Center on Global Climate Change; 2010.
Nordhaus, W. A Question of Balance: Weighing the Options on Global Warming Policies. New Haven, CT: Yale University Press; 2008.
Anthoff, D, Tol, RSJ. FUND Technical Description, 2008. Available at: http://www.fnu.zmaw.de/fileadmin/fnu‐files/staff/tol/FundTechnicalDescription.pdf. (Accessed February 25, 2012).
Hope, C. The marginal impact of CO2 from PAGE2002: an integrated assessment model incorporating the IPCC`s five reasons for concern. Integr Assess J 2006, 6:19–56.
Clarke, L, Edmonds, J, Krey, V, Richels, R, Rose, S, Tavoni, M. International climate policy architectures: Overview of the EMF 22 International Scenarios. Energy Econ 2009, 31(suppl 2):S64–S81.
IPCC WGIII. Climate Change 2007—Mitigation Contribution of Working Group III to the Fourth Assessment Report of the IPCC, 2007.
Hope, C. The social cost of carbon: what does it actually depend on? Clim Policy 2006, 6:565–572.
IPCC WGII. Climate Change 2007—Impacts, Adaptation and Vulnerability Contribution of Working Group II to the Fourth Assessment Report of the IPCC, 2007.
Solomon, S, Plattnerb, G‐K, Knuttic, R, Friedlingstein, P. Irreversible climate change due to carbon dioxide emissions. Proc Natl Acad Sci 2009, 106:1704–1709.
Moss, RH, Edmonds, JA, Hibbard, KA, Manning, MR, Rose, SK, van Vuuren, DP, Carter, TR, Emori, S, Kainuma, M, Kram, T, et al. The next generation of scenarios for climate change research and assessment. Nature 2010, 463:747–756.
Warren, R, Hope, C, Mastrandrea, MD, Tol, RSJ, Adger, N, Lorenzoni, I. Spotlighting Impacts in Integrated Assessment. Research report prepared for the Stern Review on the Economics of Climate Change. Tyndall Working Paper 91. Available at: www.tyndall.ac.uk. (Accessed February 4, 2012).
Mastrandrea, M. Calculating the benefits of climate policy: examining the assumptions of integrated assessment models. Technical report. Washington, DC: Pew Center on Global Climate Change; 2009, 60 pp. Available at: http://www.c2es.org/benefits‐workshop/mastrandrea‐calculating‐benefits‐of‐climate‐policy (Accessed February 4, 2012).
Anthoff, D, Rose, SK, Tol, RSJ, Waldhoff, S. Regional and sectoral estimates of the social cost of carbon: an application of FUND. ESRI Working Paper No. 375, 2011. Available at: www.esri.ie. (Accessed February 4, 2012).
Goulder, LH. Benefit–cost analysis, individual differences, and third parties. In: Zerbe, RO, ed. Research in Law and Economics, vol 23. Emerald Group Publishing Limited; 2007, 67–86.
Waldhoff, S, Anthoff, D, Rose, S, Tol, RSJ. The marginal damage costs of different Greenhouse gases: an application of FUND. Discussion Paper No. 2011‐43. October 14, 2011. Available at: http://www.economics‐ejournal.org/economics/discussionpapers/2011‐43. (Accessed February 4, 2012).
U.S. CBO (U.S. Congressional Budget Office). Uncertainty in Analyzing Climate Change: Policy Implications. Washington, DC: The Congress of the United States; 2005.
Anthoff, D, Tol, R, Yohe, G. Risk aversion, time preference, and the social cost of carbon. Environ Res Lett 2009, 4:7.
Newbold, S, Daigneault, A. Climate response uncertainty and the benefits of greenhouse gas emissions reductions. Environ Res Econ 2009, 44:351–377.
Manne, A, Richels, R. Buying Greenhouse Insurance—The Economic Costs of Carbon Dioxide Emission Limits. Cambridge, MA: MIT Press; 1992.
Arrow, KJ, Cline, WR, Maler, K‐G, Munasinghe, M, Squitieri, R, Stiglitz, JE. Intertemporal equity, discounting, and economic efficiency. In: Climate Change 1995: Economic and Social Dimensions of Climate Change. Contribution of Working Group III to the Second Assessment Report of the Intergovernmental Panel on Climate Change; 1996.
Portney, PR, Weyant, JP, eds. Discounting and Intergenerational Equity. Washington, DC: Resources for the Future; 1999.
Nordhaus, W. Critical assumptions in the stern review on climate change. Science 2007, 317:201–202.
Weitzman, ML. The stern review of the economics of climate change. J Econ Lit 2007, XLV:703–724.
Stern, N, Peters, S, Bakhshi, V, Bowen, A, Cameron, C, Catovsky, S, Crane, D, Cruickshank, S, Dietz, S, Edmondson, N, et al. The Economics of Climate Change. Cabinet Office—H. M. Treasury. Cambridge: Cambridge University Press; 2006.
Watkiss, P, Anthoff, D, Downing, T, Hepburn, C, Hope, C, Hunt, A, Tol, R. The Social Costs of Carbon (SCC) Review—Methodological Approaches for Using SCC Estimates in Policy Assessment. Final Report to U.K. Department for Environment Food and Rural Affairs, 2005. Available at: http://www.decc.gov.uk/assets/decc/what%20we%20do/a%20low%20carbon%20uk/carbon%20valuation/social_cost/aeat‐scc‐report.pdf. (Accessed February 25, 2012).
Nordhaus, WD. Paul Samuelson and global public goods. In: Szenberg, M, Ramrattan, L, Gottesman, AA, eds. Samuelsonian Economics and the Twenty‐First Century. New York, NY: Oxford University Press, Inc.; 2006.
Holladay, JS, Schwartz, JA. The Other Side of the Coin: The Economic Benefits of Climate Legislation, Policy Brief No. 4. New York: Institute for Policy Integrity, University School of Law; 2009.
Tol, RSJ. An analysis of mitigation as a response to climate change. Copenhagen Consensus on Climate. Denmark: Copenhagen Consensus Center, Copenhagen Business School; 2009. Available at: http://fixtheclimate.com/component‐1/the‐solutions‐new‐research/mitigation/. (Accessed February 25, 2012).
Tol, RSJ. The marginal damage costs of carbon dioxide emissions: an assessment of the uncertainties. Energy Policy 2005, 33:2064–2074.
DECC (U.K. Department of Energy and Climate Change). Carbon Appraisal in UK Policy Appraisal: A Brief Guide to The New Carbon Values and Their Use in Economic Appraisal, July 2009. Available at: http://www.decc.gov.uk/en/content/cms/emissions/valuation/valuation.aspx (Accessed February 7, 2012).
Anthoff, D, Hepburnd, C, Tol, RSJ. Equity weighting and the marginal damage costs of climate change. Ecol Econ 2009, 68:836–849.
Nordhaus, WD, Boyer, J. Warming the World. Economic Models of Global Warming. Cambridge, MA: MIT Press; 2000.
Dasgupta, P. Commentary: The Stern Review`s Economics of Climate Change. Nat Inst Econ Rev 2007, 199:4–7.
Yohe, G, Tol, R. The Stern review and the economics of climate change: an editorial essay. Clim Change 2008 89:231–240.
U.S. EPA (United States Environmental Protection Agency). Guidelines for Preparing Economic Analyses. EPA 240‐R‐00‐003, 2000.
U.S. OMB (United States Office of Management and Budget). Regulatory Analysis. Circular A‐4, September 17, 2003.
Newell, R, Pizer, W. Discounting the Benefits of Climate Change Mitigation: How Much Do Uncertain Rates Increase Valuations? Washington, DC: PEW Center on Global Climate Change; 2001.
Newell, RG, Pizer, WA. Discounting the distant future: how much do uncertain rates increase valuations? J Environ Econ Manage 2003, 46:52–71.
Weitzman, ML. Just keep discounting, but… In: Portney, PR, Weyant, JP, eds. Discounting and Intergenerational Equity. Washington, DC: Resources for the Future; 1999.
Pearce, D. The social cost of carbon and its policy implications. Environmental Policy Seminar, Oxford University, October 16, 2002. Also, working paper input to Helm, D, Pearce, DW, eds., Controlling Global Warming, Special Issue of Oxford Review of Economic Policy; 2003.
Cornes, R, Sandler, T. The Theory of Externalities, Public Goods and Club Goods. Cambridge: Cambridge University Press; 1996.
Sandler, T. Global Challenges: An Approach to Environmental, Political, and Economic Problems. Cambridge: Cambridge University Press; 1997.
Samuelson, PA. Diagrammatic exposition of a theory of public expenditure. Rev Econ Stat 1955, 37:350–356.
Bagnoli, M, Lipman, B. Provision of public goods: fully implementing the core through voluntary contributions. Rev Econ Stud 1989, 56:583–601.
Isaac, RM, Schmidtz, D, Walker, JM. The assurance problem in a laboratory market. Public Choice 1989, 62:217–236.
Bagnoli, M, McKee, M. Voluntary contributions games: efficient private provision of public goods. Econ Inq 1991, 29:351–366.
Rose, SK, Clark, J, Poe, GL, Rondeau, D, Schulze, WD. The private provision of public goods: test of a provision point mechanism for funding green power programs. Res Energy Econ 2002, 24:131–155.
Rondeau, D, Poe, GL, Schulze, WD. VCM or PPM? A comparison of the performance of two voluntary public goods mechanisms. J Public Econ 2005, 89: 1581–1592.

Society Partners

	Royal Geographical Society (with IBG)
	Royal Meteorological Society

Access to this WIREs title is by subscription only.

Recommend to Your
Librarian Now!

The role of the social cost of carbon in policy

Browse by Topic

Society Partners

Access to this WIREs title is by subscription only.

The latest WIREs articles in your inbox