If $40/t CO₂ were the "right" price, tax carbon and move on. $40/t isn't the right price. The Exxon-backed tax isn't it.
NEW YORK – If there is a single metric that captures the complexity, ambition, and desperation of climate policy, it is the “social cost of carbon” (SCC). How much does each ton of carbon dioxide emitted into the atmosphere cost society? How much should it cost each of us who emits CO2 through the course of our daily activities? And where does one draw the line between “is” and “ought” – that is, between known facts about climate change and political judgements about who should bear which costs?
These aren’t academic questions. Putting the right price on carbon could avert trillions of dollars of climate-related costs. It could determine whether or not infrastructure projects – from pipelines to bike lanes – are built, whether your next stove will be induction or gas-powered, how large your next home will be, and how far you will commute to work. A future US Congress could put America on a more sustainable economic-development path, or it could offer mere token gestures, thereby locking in dirty, outdated fossil-fuel infrastructure for decades to come. Much of this will depend on the SCC, and on politicians’ interpretations of the level of climate-policy ambition it represents.
But the SCC is not just a powerful metric; it is also a lens through which to view the world. No longer can we ignore the inherent trade-offs between economic activity and a stable climate, between short-term profit and long-term sustainability, between private and public pain. By calculating the SCC, we can improve our decision-making under conditions of uncertainty, and reveal whatever genuine limitations – political and otherwise – we may face.
The SCC could take virtually any value, from zero to infinity. Zero would indicate that CO2 emissions have no impact on climate change; infinity would mean that the release of a single additional ton of CO2 would bring an end to civilization as we know it. Within this enormous range, economists can offer an “optimal” price based on the known science. But the history of climate policymaking shows that politics ultimately will be the determining factor.
The first time someone attempted to set a price for carbon was in England in 1306. King Edward I was not worried about climate change, but he did face an air-pollution problem: his subjects were literally choking on the emissions from an especially dirty form of coal. The crown thus banned “sea-coal,” as it was known, and threatened repeat offenders with what would amount to an SCC of infinity: death. But it didn’t take long for short-term special interests to intervene. The law was soon vacated, and coal burning has continued ever since. The effective SCC paid throughout most of history has been zero.
Fast forward to 1965, when the first-ever climate report landed on a US president’s desk. It came from Lyndon B. Johnson’s science advisory committee, which included some of the pioneers of climate science, not least Charles Keeling, whose “Keeling Curve” was the first to illustrate the relentless rise in atmospheric CO2, and Wallace Broecker, who later coined the term “global warming.”
The report extrapolated from known fossil-fuel production trends at the time, and detailed the expected implications of increased global temperatures – from melting polar ice caps and rising sea levels to ocean acidification and increased photosynthesis and plant productivity. The implied SCC was far from infinity, but above zero.
Unfortunately, the committee’s work did not translate into any concrete policies that would have forced emitters to pay a price. The authors simply could not conceive of an alternative to fossil fuels, so they speculated about circumventing the problem through ventures such as solar geoengineering: “raising the albedo, or reflectivity, of the earth.”
Soon thereafter, in the mid-1970s, William Nordhaus of Yale University became the first economist to conceive of conducting a benefit-cost analysis of climate change. In 1992, he published the first version of his Dynamic Integrated Climate-Economy (DICE) model, the primary virtue of which was its simplicity. It summarized the world’s most ambitious benefit-cost analysis in fewer than 20 main equations, with just three representing the global climate.
Nordhaus, who won the Nobel Memorial Prize in Economic Sciences for his work, recommended an SCC of $2.50 per ton (in today’s dollars). That figure was the result of an assumed “optimal” global carbon price that rises over time. After some further adjustments, the same calculation made today yields a price of around $40 per ton. But we now know that this price is woefully outdated. Had Nordhaus won his Nobel 20 years ago, he would have been at the forefront of climate-economic thought. By the time he did win, in 2018, the science and politics of climate change had moved on.
For example, we now know that Nordhaus’s “optimal” pathway – global warming of 3°C above pre-industrial levels by 2100 – would be disastrous for human civilization. Hence, if one updates his own model according to the latest scientific consensus, the recommended SCC increases from $40 per ton to $100 or even $200. And if one adopts a new model that better reflects modern financial and economic thinking about risk and uncertainty, the SCC rises further still.
The gap between a carbon price of $40 per ton and one of $100, $200, or more represents the difference between stabilizing global average temperatures at somewhere close to 1.5°C or 2°C, or locking in a much, much hotter future. The first scenario represents the temperate range in which human civilization has always thrived; the second is closer to the world of two or even three geological epochs ago, when no humans inhabited the planet. It is telling that even ExxonMobil now supports a carbon tax in the $40 per ton range. An SCC that low will not drive the change needed to achieve net-zero CO2 emissions within the next two or three decades.
Most importantly, regardless of what the SCC is set at, a carbon tax shouldn’t be the only policy response. After all, economists, too, have made enormous strides on the climate issue. The debate has moved well beyond a “global uniform carbon tax,” featuring everything from German Passivhaus efficient-building codes and investments in support of rapid deployment of renewables to carbon capture technologies.
How such policies should be implemented is an issue for politicians, who must make difficult ethical and distributional decisions. Questions of how to decarbonize are intensely political, and for good reason. But whether to align prices and targets with the latest science should not be up for debate.
Gernot Wagner teaches climate economics at New York University. He is the co-author, with the late Martin Weitzman, of Climate Shock.
Published by Project Syndicate on September 30th, 2020.