By Frank Ackerman, principal economist at Synapse Energy Economics in Cambridge, Mass., and one of the founders of Dollars & Sense, which publishes Triple Crisis. Originally published at Triple Crisis
Second in a series on climate change policy. See Part 1 here
According to scientists, climate damages are deeply uncertain, but could be ominously large (see the previous post). Alternatively, according to the best-known economic calculation, lifetime damages caused by emissions in 2020 will be worth $51 per metric ton of carbon dioxide, in 2018 prices.
These two views can’t both be right. This post explains where the $51 estimate comes from, why it’s not reliable, and the meaning for climate policy of the deep uncertainty about the value of damages.
A Tale of Three Models
The “social cost of carbon” (SCC) is the value of present and future climate damages caused by a ton of carbon dioxide emissions. The Obama administration assembled an Interagency Working Group to estimate the SCC. In its final (August 2016) revision of the numbers, the most widely used variant of the SCC was $42 per metric ton of carbon dioxide emitted in 2020, expressed in 2007 dollars – equivalent to $51 in 2018 dollars. Numbers like this were used in Obama-era cost-benefit analyses of new regulations, placing a dollar value on the reduction in carbon emissions from, say, vehicle fuel efficiency standards.
To create these numbers, the Working Group averaged the results from three well-known models. These do not provide more detailed or in-depth analysis than other models. On the contrary, two of them stand out for being simpler and easier to use than other models. They are, however, the most frequently cited models in climate economics. They are famous for being famous, the Kardashians of climate models.
DICE, developed by William Nordhaus at Yale University, offers a skeletal simplicity: it represents the dynamics of the world economy, the climate, and the interactions between the two with only 19 equations. This (plus Nordhaus’ free distribution of the software) has made it by far the most widely used model, valuable for classroom teaching, for initial high-level sketches of climate impacts, and for researchers (at times including myself) who lack the funding to acquire and use more complicated models. Yet no one thinks that DICE represents the frontier of knowledge about the world economy or the environment. DICE estimates aggregate global climate damages as a quadratic function of temperature increases, rising only gradually as the world warms.
PAGE, developed by Chris Hope at Cambridge University, resembles DICE in level of complexity, and has been used in many European analyses. It is the only one of the three models to include any explicit treatment of uncertain climate risks, assuming the threat of an abrupt, mid-size economic loss (beyond the “predictable” damages) that becomes both more likely and more severe as temperatures rise. Perhaps for this reason, PAGE consistently produces the highest SCC estimates among the three models.
FUND, developed by Richard Tol and David Anthoff, is more detailed than DICE or PAGE, with separate treatment of more than a dozen damage categories. Yet the development of these damages estimates has been idiosyncratic, in some cases (such as agriculture) relying on relatively optimistic research from 20 years ago rather than more troubling, recent findings on climate impacts. Even in later versions, after many small updates, FUND still estimates that many of its damage categories are too small to matter; in some FUND scenarios, the largest cost of warming is the increased expenditure on air conditioning.
Much has been written about what’s wrong with relying on these three models. The definitive critique is the National Academy of Sciences study, which reviews the shortcomings of the three models in detail and suggests ways to build a better model for estimating the SCC. (Released just days before the Trump inauguration, the study was doomed to be ignored.)
Embracing Uncertainty
Expected climate damages are uncertain over a wide range, including the possibility of disastrously large impacts. The SCC is a monetary valuation of expected damages per ton of carbon dioxide. Therefore, SCC values should be uncertain over a wide range, including the possibility of disastrously high values.
Look beyond the three-model calculation, and the range of possible SCC values is extremely wide, including very high upper bounds. Many studies have adopted DICE or another model as a base, then demonstrated that minor, reasonable changes in assumptions lead to huge changes in the SCC. To cite a few examples:
- A meta-analysis of SCC values found that, in order to reflect major climate risks, the SCC needs to be at least $125.
- A study by Simon Dietz and Nicholas Stern found a range of optimal carbon prices (i.e. SCC values), depending on key climate uncertainties, ranging from $45 to $160 for emissions in 2025, and from $111 to $394 for emissions in 2055 (in 2018 dollars per ton of carbon dioxide).
- In my own research, coauthored with Liz Stanton, we found that a few major uncertainties lead to an extremely wide range of possible SCC values, from $34 to $1,079 for emissions in 2010, and from $77 to $1,875 for 2050 emissions (again converted to 2018 dollars).
- Martin Weitzman has written several articles emphasizing that the SCC depends heavily on the unknown shape of the damage function – that is, the details of the assumed relationship between rising temperatures and rising damages. His “Dismal Theorem” article argues that the marginal value of reducing emissions – the SCC – is literally infinite, since catastrophes that would cause human extinction remain too plausible to ignore (although they are not the most likely outcomes).
Whether or not the SCC is infinite, many researchers have found that it is uncertain, with the broad range of plausible values including dangerously high estimates. This is the economic reflection of scientific uncertainty about the timing and extent of climate damages.
How Much Can We Afford?
As explained in the previous post in this series, deep uncertainty about the magnitude and timing of risks stymies the use of cost-benefit analysis for climate policy. Rather, policy should be set in an insurance-like framework, focused on credible worst-case losses rather than most likely outcomes. Given the magnitude of the global problem, this means “self-insurance” – investing in measures that make worst cases less likely.
How much does climate “self-insurance” – greenhouse gas emission reduction – cost? Several early (2008 to 2010) studies of rapid decarbonization, pushing the envelope of what was technically feasible at the time, came up with mid-century carbon prices of roughly $150 – $500 per ton of carbon dioxide abated.[1] Since then, renewable energy has experienced rapid progress and declining prices, undoubtedly lowering the carbon price on a maximum feasible reduction scenario.
Even at $150 to $500 per ton, the cost of abatement was comparable to or lower than many of the worst-case estimates of the SCC, or climate damages per ton. In short, we already know that doing everything on the least-cost emission reduction path will cost less, per ton of carbon dioxide, than worst-case climate damages.
That’s it: end of economic story about evaluating climate policy. We don’t need more exact, accurate SCC estimates; they will not be forthcoming in time to shape policy, due to the uncertainties involved. Since estimated worst-case damages are rising over time, while abatement costs (such as the costs of renewables) are falling, the balance is tipping farther and farther toward “do everything you can, now.” That was already the correct answer some years ago, and only becomes more correct over time.
That’s not the end of this series of blog posts, however. Three more are coming, addressing three policy problems that arise in climate advocacy: how to talk about methane and natural gas; taxes versus cap and trade systems; and the role of equity and economic obstacles to climate policy.
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Do everything you can now. Yes but someone has to have an idea of “where you want to go” and I think this makes decissions more difficult. There is a need to presciently decide which routes would yield better results on greenhouse emission reduction.
For instance, as we recently have seen on commentaries here at NC, a very lively discussion yesterday, on the model of energy supply. There is a deep divide between those that prioritize nuclear energy or renewables as the fastest way to figth climate change. It is quite difficult to have an idea on what is the best option and I think vlade was the one to make better analysis on uncertainties.
One of the reasons is that one should not focus only on the generation or supply side of the energy equation and it is being seen as increasingly important to analyse how the demand side works and how demand will or should have to change to accomplish the goal. Every demand sector, agricultural, residential, commercial, industrial and transport has its own set of challenges and needs. Any sector is composed by different mixes of energy consuming devices, have different consumption profiles and different approaches will be needed to adress each set. So, saying that “nuclear” or “renewables” is the solution is not the comprehensive approach needed. There are also geographical differences and wind, sun, tides, hydro, geothermal or uranium availability is not the same everywhere.
So, on the supply side there is not a single solution that fits all needs.
I’ve been doing a lot of reading and research on climate change since Yves GND is not enough post and I can’t find any reason anywhere to be even the slightest bit optimistic. It’s highly likely it’s already too late, and it will most assuredly be too late before any kind of modern consensus will result in action to do anything meaningful.
Yes, this is the “there’s nothing can be done” excuse to do nothing
We need Entrepreneurs! More Entrepreneurs!
Some time ago someone here linked to a video of some German professor (a bit vague, sorry!) who calculated that the maximum possible contribution of all renewables amounts to 50% of our current consumption. I didn’t entirely agree with everything he said but it’s a thought provoking data point nonetheless.
My reaction to some of the nuclear comments yesterday was ‘you talk like we have a choice’.
Do you really think that this, “where you want to go”, can be trusted on some unknown german that “some” time ago said something recorded in video?
Heh, I would hope those with the power to decide would do their own research. They certainly aren’t listening to me, except in the same way they listen to everybody.
Check out Are Antarctica’s Glaciers Collapsing?. It is probably behind a pay wall so here is the punchline:
I interpret this as saying ‘if there isn’t a big seafloor bump close to the current edge of Antartica’s Thwaites Glacier the world can kiss its major cities goodbye much sooner than expected.
Once again I am reminded of Joan Baez’s Blessed Are:(Something like)
P.S. Thanks for the links not just to great posts but to whole series, e.g. Mikulka’s series on fracking.
Modelling Chaos does not produce accreate results?
What a surprise!
Well, there is about 5½ pounds of carbon in a gallon of gas.
This means that a $100/ton tax on carbon is about 27½¢ a gallon.
It seems to me that ramping up to a $400/ton carbon tax over a few (5?) years, with, and this is important, the tax being implemented in the manner of a VAT, (refunded on exports and charged on imports) and so applied to total carbon footprint, and not just carbon emissions, would be minimally disruptive.
By way of making it more politically palatable, you could make it refundable to people on a per-person basis.
Once the tax is fully in place, you can then iteratively raise the taxes as needed.
The devil is in the politics.
James Hansen tried solving this problem, including the political part of this problem, with his Fee And Dividend concept. I don’t know if he thought about the Foreign Economic Aggressor carbon-dumping problem. It seems like the ” refunded on exports and charged on imports” is a way to try and address the Economic Aggression carbon dumping problem. Would it work as hoped?
Whatever we do, nothing will work in a Forced Free Trade environment. Anything we do to raise the carbon costs on domestic producers will be undercut by Enemy Alien producers not adopting the same level of carbon tax cost and thereby underselling any American production no matter how low the American producer tries to drive its own price.
If we don’t abolish Free Trade and institute Militant Belligerent Carbon Protectionism, any carbon tax within America is just Performative Virtue Display.
This carbon fee and egalitarian rebate process is precisely what HR 763, currently in the U.S. House, proposes. It is what Citizens Climate Lobby has worked for for years. While it is a market-incentive based plan, and thus not a panacea, there are no (remotely realistic) panaceas, so that’s no reason to oppose it. It’s a very substantial and precedent-setting improvement and catalyst for further efforts. At this point we need not just “both/and” efforts, but “ALL/and” efforts–every angle of attack is needed to mitigate imminent disaster. I hope all NC readers will write their reps and senators and urge support for it.
thank you. I will look at that legislation. I though the only (somewhat focused on) climate legislation we have active now is the Green New Deal and that not fleshed out.
I hope whatever is in that bill is “pure Hansen”. Hansen’s plan wasn’t a device to raise money. It is a device to torture fossil carbon out of the energy market and exterminate the fossil fuel industry from existence. I believe the fee charged right at the point-of-first-sale of the raw-fossil-fuel-material is supposed to keep steadily increasing so as to achieve the torture and extermination goal.
Anything less would be uncivilized.
Actually, the rule of thumb is that a dollar per ton is roughly a penny per gallon. Still: I see a dollar a gallon difference in gas station prices within a half-hour of my house.
Converger is correct, as the tax is on the carbon dioxide resulting from burning the gasoline. The weight of the carbon dioxide includes the weight of the atmospheric oxygen that joins with the carbon in the gasoline when it’s burned. A gallon of gasoline produces about 20 pounds of CO2.
HR 763 starts off with a $15 per ton of CO2 tax, raising it every year by another $10 (perhaps slightly more if deemed necessary.) This gradual approach will not be a serious hardship on any but the poorest or most carbon-dependent–and of course all folks participate in the rebate, mitigating the damage.
But we can also push for an MMT-style bonus for the poor, to help them deal with potential harm. Over and above the tax rebate, an “Environmental Security” payment each month, just like a Social Security one, for say $100 a month, and for only the bottom say 30% or 40% of households, will help alleviate the regressiveness of the tax, and of course is a great idea anyway… :)
Carbon taxes are not popular at NC but I think they’re a very obvious method to help reduce CO2 emissions. While not a panacea, it would certainly entice businesses to reduce their carbon footprints, and it’s one of very few environmental policy ideas that both sides of the aisle can get behind. Of course a Green New Deal would be better for people and more effective, but the two are certainly not mutually exclusive, and at this point, a carbon tax has a much better chance of actually becoming law.
The Baker-Schultz plan that the Climate Leadership Council is pushing is about the only thing that has ever come out of the Republican party that I can actually get behind. The thing with carbon taxes is that they’re impossible to pass in the US because both sides end up bickering over how the revenues should be spent, and eventually, most up feeling shortchanged because they didn’t get a big enough piece of the piece. But by distributing all of the revenue back to the public as a dividend (which is progressive because the wealthier will end up being taxed more than the poor but everyone will get the same amount back), no one complains, and there’s nothing Americans like more than getting free money.
Assuming we are to reduce the level of atmospheric CO2 to, let’s say 350ppm, what are the total number of tons that must be removed. This article discusses the cost per ton to “decarbonize” but not the total amount of work to be done. The status quo is already problematic, so it appears that merely eliminating ongoing CO2 emissions will not suffice.
Also, the comment about modeling chaotic systems is correct. We may be heading for a new strange attractor.
That’s where massively accelerated plant-growth for plant storage and soil storage of down-sucked skycarbon would have to come in.
And maybe also the eprida-style pyrolitic semi-combustion of plant material to burn the volatile off-gassing gases for energy and save the hard carbon for construction use or aggregate use or building vast pyramids of charcoal in the desert.
Or even . . . who knows? . . . fine-grinding the charcoal and mixing it back into millions of square miles of soil for Neo-Terra Preta 2.0 all over the world.
I have been reading a lot about the socialist calculation debate recently. Two of Ackerman’s books are really worth reading and touch on those issues (Poisoned for Pennies and Priceless). I also have and really like his book (Can We Afford the Future?) about this issue. I agree entirely with ecological economists like Joan Martinez Alier that there are limits to prices, that there are no such things as ecologically correct prices, and that we need to include what we can price along with things we can’t in regards to the economy. In the socialist calculation debate, people like Otto Neurath and later on Karl William Kapp were critical of our capacity to reduce complex heterogeneous impacts to a single metric, a market value, and he was for similar reasons critical of Marx saying that exchange values can be established by the socially necessary time it takes to make things. Neurath started the socialist calculation debate with his full socialization plan, which was created in Austria and called for a moneyless and market-less economic system. von Mises responded by arguing that economic calculation was needed to distribute resources throughout the economy. He acknowledged that there were limits to monetization, but said that an economy that included all relevant information into the pricing mechanism would be “rational”. To the extent that markets are missing information, they would then be irrational. Hayek made somewhat similar arguments, but he conceded that socialism was possible in theory (von Mises denied this), and focused later on about prices and markets conveying information. Well, our economy is irrational, and increasingly so.
How exactly could we price carbon since it would have to include worst case scenarios? If a ton of carbon leads to societal collapse, can you price something like that? Can we price something when we don’t know its full impact? Ecological impacts are complex, and impacts can be indirect, and/or circular, and our knowledge of the damage we are causing is pretty limited. Like, when we cut down large portions of the Amazon, do we really know what we are destroying? And even if we could price carbon to reflect its actual impact, big if, would everything not explode in price? Carbon is embodied in everything, after all. If the idea is that we price something to influence behavior, is it realistic to use the market in this chaotic system of ours? 360 million Americans, acting independently, with no coordination, are somehow going to operate in a way that is collectively sustainable? Is that realistic in the least bit, or do we need to acknowledge that planning of some kind will be needed and that the planning would necessitate giving the state more power than it currently has?
Given all the stuff that was discussed in the socialist calculation debate, I think it is utopian to think that a chaotic and decentralized market system can operate within sustainable limits. I think that we need to determine the bounds of aggregate consumption and pollution generation, and then to use something like a market thereafter to allow for some logical way to distribute goods and services, to allow for the communication of information and to allow for firms to calculate things like efficiency. But that is not how markets are utilized now at all. I also think that capitalism isn’t a system that functions well in the absence of growth in throughput generation and once we have reached the limits of pollution generation. There are no physical limits to money creation and the financial sector though. One way or another, it is a system issue.
Anyone agree, disagree?
Grant: I think you capture many of the essential questions, especially as regards the inconsistencies of relying on market mechanisms as a remedy for the rapidly unfolding climate disasters.
My experience with advising policy makers in one of the world’s largest economies is that the policies deemed acceptable by corporate lobbyists are predicated rejecting any meaningful intrusions by the public on the operation of ‘free’ markets. Thus, in 2006 California embraced a pollution trading scheme (AB 32, emissions trading) as a key mechanism addressing carbon emissions with virtually no consideration of pricing, the social costs of pollution, and a rapidly deteriorating climate.
Fast forward to 2019 and one finds that California has assisted with spreading a disastrous pollution trading scheme on a global scale. Worse still, this same mechanism has been used to effectively disrupt a suite of strict regulatory laws that had advanced the state’s energy efficiency and energy reduction on a broad scale.(e.g., energy conservation, appliance standards, engine emissions, renewable portfolio standards, clean energy programs, building standards, technology standards for refineries).
My experiences following decades of battling against corporate lobbyists and their masters follows a similar vein as the author : “We don’t need more exact, accurate SCC estimates; they will not be forthcoming in time to shape policy…. the balance is tipping farther and farther toward “do everything you can, now.” My caveat, of course, would be to embark on a much more audacious approach with respect to the worsening climate crises.
In this regard, the outlines of a New Green Deal require a much more vigorous and muscular treatment of free markets……
The thing to do is to do something. Policy is great, but really the point is to get off your duff and do something individually. Today. Get solar installed. Buy an EV. These are not enough. I’m not quite sure what we do about commerce and aviation, but it is better than nothing. It will take the force of law to turn around the airlines and manufacturing, but fixing those alone aren’t enough either.
Start now with what you can do. Lobby for what you can’t.
Somehow I think it is already a lost cause if these are the terms of detbate – ” the price of air.”
Pretty much. I still have seen no reason to think the choice is anything other than destroy your economy to save your ecology or save your economy and destroy your ecology (which in turn will destroy your economy in the long run).It’s popular to use the same kind of thinking that got us into this mess to try to get out of it. Namely putting a price on everything. Somehow it doesn’t strike me as a good way to go about it.
There has already been so much carbon emitted that if we stopped entirely, today, it would not be enough of an effort to avert catastrophe. What we have to be talking about now is what it would take to mitigate, if only a little, the catastrophe that is coming. The idea of carbon markets was an inadequate but better-than-nothing idea 30 years ago. Today, it is ludicrous. No, we shouldn’t give up. However, pointing out that urinating into a 300mph wind doesn’t qualify as “doing something “ is not giving up. It is simply the truth.