Climate Risks and Carbon Prices:Interpreting the Social Cost of Carbon

Frank Ackerman19 October

2011

Climate science vs. economics

• Climate change in science– Immediate response is needed– Business as usual threatens lives, communities

• Climate change in economics– Cost-benefit analysis is needed – Important to ensure we don’t spend too much

• Both cannot be correct!– A major effort to refute the science has failed– Therefore, a new climate economics is needed

Valuing climate damages

• Cost-benefit analysis requires monetary prices for everything of value

• Climate damages summarized in “social cost of carbon” (SCC)– Defined as present value of present and future damages from

emission of one more ton of CO2

– Depends on discount rate, modeling of future damages

• Larger SCC → stronger climate policy recommendation• No active proposals to use as basis for carbon tax

The U.S. “social cost of carbon”APPENDIX 15A. SOCIAL COST OF CARBON FOR REGULATORY IMPACT ANALYSIS

UNDER EXECUTIVE ORDER 12866 Interagency Working Group on Social Cost of Carbon,

United States Government

With participation by Council of Economic Advisers

Council on Environmental Quality Department of Agriculture Department of Commerce

Department of Energy Department of Transportation

Environmental Protection Agency National Economic Council

Office of Energy and Climate Change Office of Management and Budget

Office of Science and Technology Policy Department of the Treasury

(No office, no address, no website, no publicity, no named authors)

The number: $21 per ton of CO2

• $21 / ton CO2 ≈ US $0.21 / gallon of gasoline– Equivalent to 0.74 peso / liter

• The $21 estimate is an average of 15 results– 5 emission scenarios, 3 models; constant 3% discount rate

• Emission scenarios from EMF-22– Roughly comparable to IPCC’s B2 emissions

• Model averages– PAGE: $30 DICE: $28 FUND: $6

• FUND estimates big net benefit in agriculture– Based on very old research, now out of date– Also contains a serious software bug (divide-by-zero error)

• Without FUND, average is $29– Roughly 1 peso / liter of fuel

Mapping science to economics: 1

Scientific assessment of damages

Economic assessment of damages

$21/ton CO2

This mapping changes the structure of

information

Mapping science to economics: 2

Scientific assessment of damages

Economic assessment of damages

This mapping preserves the structure of

information

Low SCC ($21?)

Higher SCC

Disastrously high SCC

Our re-analysis of SCC

• Use DICE model, as modified by Working Group for US analysis of SCC

• Explore effects of four variations1. Median vs. 95th percentile climate sensitivity (3.0 vs. 7.1)2. Discount rate: 3.0% vs. 1.5% (close to Stern Review rate)3. Low-temperature damages:

DICE default (low) vs. Hanemann estimate (4 x DICE)

4. High-temperature damages:DICE default (low) vs. Weitzman estimate (disaster at 12oC)

Four damage functions

0

0.25

0.5

0.75

1

0 2 4 6 8 10 12

Frac

tion

of o

utpu

t lo

st to

clim

ate

dam

ages

Temperature increase (oC)

H-W

N-W

H-N

N-N

Nordhaus at 2.5o

Hanemann at 2.5o

Weitzman: 50% loss at 6o, 99% loss at 12o

DICE damage function: simple extrapolation from low-temperature damage estimate

Alternate SCC values, 2010

$264

$622

$888 $893

$118

$347$411

$481

$56

$165$200 $232

$28$96 $77

$118

$0

$200

$400

$600

$800

$1,000

Soci

al c

ost

of c

arbo

n ($

/tCO

2), 2

010

Damage functions

1.5%, 95th percentile 1.5%, average 3%, 95th percentile 3%, average

N-N N-WH-N H-W

Alternate SCC values, 2050

$418

$910

$1,550$1,430

$198

$558

$761$817

$123

$315

$534 $509

$64$202 $225 $275

$0

$400

$800

$1,200

$1,600

Socia

l cos

t of c

arbo

n ($

/tCO

2), 2

050

Damage functions

1.5%, 95th percentile 1.5%, average 3%, 95th percentile 3%, average

N-N N-WH-N H-W

$150 - $500

Marginal cost of maximum feasible abatement scenarios

Costs of rapid abatement

• Inter-model comparison project (PIK, Germany)– Five models: scenarios stabilizing at 400 ppm CO2 by 2100

– Marginal cost in 2050: $150 - $500 / ton CO2, average $260

• International Energy Agency “BLUE Map”– Stabilization at 450 ppm CO2

– Marginal cost in 2050: $175 - $500 / ton• Range of estimates reflects technology optimism / pessimism

• UK government guidance on long-term carbon prices– Marginal abatement cost for a 2oC scenario– Range of about $150 - $500 / ton in 2050

How close to infinity is close enough?

• Under many of our variants, the SCC exceeds the marginal cost of maximum feasible abatement– So anything reasonable passes a cost-benefit test– Cost-benefit analysis becomes identical to precaution

• Weitzman: under plausible assumptions, the marginal benefit of abatement is infinite– Our analysis: under worst-case risks, SCC is so high that it has

the same implication as infinite cost– Doubling worst-case SCC has no effect on policy

• Compare to: 2 * = • Policy recommendation: reduce emissions as fast as

feasible

Frank.Ackerman@sei-us.orghttp://www.sei-us.org/ClimateEconomics

Stockholm Environment Institute - US Center

Tufts UniversitySomerville MA

USA

Our study of the SCC:http://www.economics-ejournal.org/economics/discussionpapers/2011-40

- or Google “Ackerman e-journal SCC”