The social cost of carbon

By Kate Sheppard

That unchecked climate change will cost us is already well established. Left unaddressed, it will cost the United States about $1.9 trillion per year by 2100, which is nearly 2 percent of the projected GDP. In order to avoid those future costs, the fundamental policy prescription would be to put a price on carbon dioxide now that accounts for these long-term consequences of our carbon output. For this to work, however, the price would have to be high enough to actually drive change.

This is the basic premise of the climate bill recently offered up in the Senate. The bill would price carbon, keeping it within a firm "price collar": an upper and lower limit on the price of carbon, intended to stabilize the market. This bill sets the price of carbon at a minimum of $12 per ton (increasing at 3 percent over inflation each year) and a maximum of $25 per ton (increasing at 5 percent over inflation annually).

It's a start, but are we significantly low-balling the real cost of carbon? A report issued in April from the Stockholm Environment Institute's U.S. Center on the social cost of carbon indicates that the likely price here in the U.S. will be "far too small a price incentive to prompt substantive mitigation." The social price of carbon – meaning, the cost of cutting emissions weighed against the future benefits of doing so – simply won't be high enough to achieve the desired goals of the policy. The two economists who wrote the report look at an anticipated social cost of carbon of $21 per ton in 2010, drawn from a rather obscure government document.

The figure's obscurity doesn't really matter; even that is on the high end of what we could expect under the Senate bill, and the price is expected to stay on the lower side of the collar. The carbon market analysis firm Point Carbon estimates that the price would average just $26 per ton through 2030. As the Stockholm report concludes, basing policy on such a low estimated social cost of carbon "could result in ineffectual regulations that would barely reduce U.S. emissions, if at all."

Solve Climate's Dave Levitan makes some great points about the report, the reasons we underestimate the figure, and the consequences of doing so. The report authors note that the models used to come up with the $21 figure in the U.S. prioritize current economic wealth over future economic wealth; that it doesn't take into account that the majority of the pain of climate change will be felt in other, poorer nations, and that it reflects only the most modest estimations of possible future risks.

The disparity is perhaps most notable when compared with our counterparts in Europe, as Levitan notes: "For comparison, government estimates of the social cost of carbon in the United Kingdom range from $41 to $124 per ton of CO2, with a 'central case' of $83 per ton."

Although a lower price is easier now, it could be setting us up for a policy failure down the line.

Kate Sheppard covers energy and environmental politics in Mother Jones's Washington bureau. For more of her stories, see here, and you can follow her on Twitter here.