Climate change is a classic externality (or, from another point of view, publicgood) problem, symptomatic of market failure. The market price of goodsand services produced from carbon fails to account for some of the costs of carbon-based production and consumption. Those costs are externalizedfrom the market, but ultimately are borne by people somewhere. Thus, theclassic externality graph (above), which describes all conventional pollutionproblems, equally applies to the problem of climate change.
How is the SCC established?
Economists determine the damage function from different levels of carbonemissions and/or ambient concentration levels. The physical consequencesof climate change entail socio-economic consequences, not all of which arepriced in markets. For non-market harms (and benefits) economists must usesecond-best proxies, such as contingent valuation, to estimate values. Onceall of the external costs (and benefits) from carbon emissions have beenestimated, economists calculate net costs (or benefits). Virtually alleconomic models have found net social costs. Those net social costs areadded to the private-market costs associated with carbon emissions toderive the SCC.
Different economic models and interpretations of those models, in the peer-reviewed literature, have yielded different values for the SCC, ranging fromless than $10 per ton of carbon dioxide equivalent to more than $300 perton.
In 2010, the US government’s Federal Interagency Working Group(hereinafter “working Group”) derived a central estimate of the social cost of carbon (for 2010) of $21.40 per ton of carbon dioxide equivalent.
See Richard S.J. Tol,
The Social Cost of Carbon: Trends, Outliers, and Catastrophes,
Economics Discussion Papers 2008-25 Table A-1 (Sept. 19, 2007). Tol’s meta-analysis quiteproperly does not consider estimates outside of the peer-reviewed literature, some of whichestimate far higher values of the SCC. Other estimates, from the non-peer-reviewedliterature, derive values for the SCC exceeding $1000/ton.
Frank Ackerman andElizabeth A. Stanton, “The Social Cost of Carbon: A Report for the Economics for Equity andthe Environment Network” (April 1, 2010)<http://www.e3network.org/papers/SocialCostOfCarbon_SEI-20100410.pdf>.
Federal Interagency Working Group, Appendix 15A, Social Cost of Carbon,
Social Cost of Carbon for Regulatory Impact Analysis under
Executive Order 12866