Social Cost of Carbon

Sometimes a small number can add to a lot. And when that number is used to make big decisions, then we should sit up and pay attention.

The social cost of carbon (SCC) is – at its core – a pretty simple thing. It tells us how much emitting an additional tonne of carbon into the atmosphere at a particular point in time does in damage to our society. It’s the “social cost”, i.e. the cost to us all, of emitting carbon. That kind of number has a pretty totemic value: it’s the raw calculation of the damage we do to our society by continuing to emit carbon into the atmosphere, and puts the lie to the idea that dumping pollutants – even into something as vast and seemingly unassailable as our atmosphere – is cost free.

On that basis, news that the U.S. government has revised upwards its social cost of carbon (by between 50% and 60%) is significant. It reflects increasing certainty that the damage imposed on our society (in this case American society specifically) is likely to be greater than previous estimates have shown. A reference number like the SCC needs to reflect that.

What are the implications of increasing the social cost of carbon? Because the SCC is used by governments (including Canada’s) to assess the benefits and costs of regulations targeting things like energy sector emissions, an increase in the SCC can effectively translate into tighter controls. Tighter controls might mean higher costs, but they also mean higher benefits (through avoided emissions). The other way in which revised SCC numbers have an impact is in choices businesses make on the shadow carbon price that they use in the internal planning and strategies. The reference function that the SCC plays is what matters here, reflecting governments’ best guess on what carbon should cost. That is useful input for companies that do use a shadow price to anticipate policy action by governments.

No word yet from the Canadian government on whether it will revise its own SCC calculations. Canadian numbers reflect impacts to Canada of climate change damage, and so they are necessarily different from the American SCC. But if the certainty is growing of increased damages across the board, it stands to reason that Canada’s social cost of carbon will increase too. Stay tuned…