We are already experiencing the consequences of climate change. Disruptions to transport, energy and labour productivity have made themselves felt already, while disappointing harvests due to the heat are set to come this fall. We should expect even hotter summers in the coming years, as we are still aggravating climate change. And hotter summers are just one of the many damages that climate change will cause. These damages range from the impacts of more frequent heats and droughts to rising sea levels, increased flooding, more (tropical) storms, increased human mortality and greater biodiversity loss.
Prevention is worth a lot
Clearly, preventing further climate change is worth a lot of money, because it would save deaths, nature degradation and a range of economic costs in the future. In fact, the more climate change continues, the more valuable it becomes to prevent further emissions. The costs to climate change are non-linear, with the marginal cost of emissions rising.
Yet, when policymakers are faced with tight budgets and many competing priorities, policies to mitigate climate change often are deprioritised. The most painful recent example was the weakening of the EU ETS, where in the interest of marginally lowering energy prices for ‘competitiveness’, we accepted up to one-third additional emissions. One reason for this might be that the costs of climate change are not made visible sufficiently throughout the policymaking process. It’s easy to ignore costs if they are invisible.
The social cost of carbon (SCC) could solve this. It reveals the economic costs of climate change well into the future. In economist speak, the social cost of carbon is the “net present value of welfare losses from an additional ton of CO2”. The Economist dubbed it ‘the most important economic number you’ve never heard of’ in 2017. It did so because, if properly integrated, it could materially shift policy decisions away from climate damage and towards strong mitigation. Almost ten years later, almost nobody heard of it still.
Costs and benefits are the lingua franca
I would wholeheartedly argue that there is an inherent value to human and animal lives and preserving nature that would, to me, justify mitigating climate change beyond purely economic damages. But, costs and benefits are the lingua franca in economic policy. I therefore think a social cost of carbon can be a useful tool to accelerate climate action.
Yet, the devil is in the details. There is quite a lot of academic literature estimating social costs of carbon, but estimating the total costs of climate change is extremely hard. It involves complex models involving both ‘the climate system’ and ‘the economic system’ with lots of underlying assumptions, and requires judgment about how to value climate costs well into the future.
Increasing estimates for social costs of carbon
Over time, the estimates for the social costs of carbon have increased substantially. One key reason for this shift is a lower discount rate. The discount rate determines how much future damages ‘count’ as economic costs from a tonne of carbon emitted today. Early SCC estimates relied on market interest rates to discount future climate damages, effectively making the political choice that any costs to future generations matter less than costs to current generations. Early SCC estimates were as low as 12 $ per tonne of CO2.
Other factors increasing the SCC are better climate modelling, including our understanding of tipping points and persistence of damages. Estimates in the past year from reputable journals, employing various methodologies, all end up with an SCC well over $1000 per tonne of CO2. To bring it to a human level; a tonne of CO2 is emitted on a round-trip flight from Amsterdam to Madrid for a family of four.
So, can policymakers work with a number that is being actively debated and shifting upwards over time, or should they wait until academic consensus has been reached?
My answer would be that policymakers have no time to wait for a better estimate. Climate change is unfolding before our eyes. We know that we do not fully understand climate change yet, and that crossing tipping points would lead to irreversible damages. These uncertainties make using a high estimate of the SCC a rational choice when evaluating policy options. Concretely, this means a number well in the thousands of euros per tonne CO2. The Dutch Province of Utrecht already employs a shadow price of 1175 euros per tonne of CO2, which they rightly explain is really a minimum level. 2500 euros per tonne would be very defensible, while 900 euros would not be.
So what would happen to policy decisions if a social cost of carbon was taken into account consistently? Well, imagine it had been applied to the recent changes to EU ETS. At an estimated 2.89 gigatonnes of extra CO2 emissions until 2050, using the minimum SCC of 1175 euros per tonne, the total cost of carbon involved in this change is a staggering 3,395 billion euros. That is about 18% of the EU’s GDP in 2025. Clearly, that is an exorbitant price to pay for marginally cheaper energy bills for EU industry.
