More on the Social Cost of Carbon — Are We Doing It All Wrong?

Last month, I posted about the Biden administration’s effort to develop a new estimate of the social cost of carbon.  The EO requires a new interim SCC within 30 days and a new longer-term SCC by January 2022.  Earlier this week, Joseph Stiglitz and Nicholas Stern – it doesn’t get more impressive than a Nobel prize winner and an actual Lord – released a National Bureau of Economic Research Working Paper (non-academics can download up to three papers free per year) in which they argue that, not just is the value we’ve place on the SCC too low, but that the methods we have used to develop the SCC are fundamentally flawed.

Stiglitz and Stern identify a number of flaws in the “Integrated Assessment Models” currently used to set the SCC.  One key flaw I had not really considered previously is that:

It is a fundamental mistake to begin the analysis of climate change under the premise that, but for the mispricing of emissions, the economy is efficient. And there are limits on the ability of government to “correct” these market failures.

It’s a gross oversimplification, but the quick summary of their recommendation is that, rather than determining the marginal damage caused by climate change and setting the SCC based on that, we should instead determine what increase in global temperatures humanity and the planet can actually tolerate and set a carbon price that will get us there.  As they fairly point out, we have already done the first part; it’s called the Paris Agreement.  Similarly, many governments have now established goals of net carbon neutrality by 2050. So what should be the price of carbon that will ensure a temperature raise of no more than 2 degrees Celsius (and, we hope, closer to 1.5 degrees Celsius)?

The Working Paper is more about methodology than implementation, but it’s clear that we’re talking about a price above $100/ton, and fairly soon.  If I had to guess, I’d predict that the Biden administration will get to this result.  However, it is likely to do so, not by adopting the approach recommended by Stiglitz and Stern, but just by lowering the discount rate sufficiently to result in an SCC > $100/ton.

Either way, carbon is about to get much more expensive.

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