Fikriyatul Falashifah

Master of Development Studies

Student Number: 300408737
Assignment 1 ENVI 528 Climate Change Issues

SOCIAL COST OF CARBON: A BRIEF SUMMARY

Climate change is one of the current environmental problems that actually causes severe

consequences for many sectors. It can also politically, economically, and socially affect the society

and their surrounding nature. Its impacts such as extreme weather events, carbon emission, sea level

rise, coastal destruction, and the spread of disease can eventually cost families, businesses or even

governments hundreds of billion dollars. This essay will explain briefly about the so-called social

cost of carbon, including the importance, estimating tools, limitations and other alternative concepts.

In 2010, The Interagency Working Group (IWG) developed a concept called the social cost of carbon

(SCC), a comprehensive metric design that represents net economic cost of climate impacts (Institute

for Policy Integrity, 2017, pp. 1-2), especially from carbon dioxide emissions that cause change in

social welfare (Kopp et al., 2012, p.1) a given year. This concept was first published on February

2010 as a monetized value of marginal benefit in reducing carbon dioxide emission in a unit of metric

ton (Johnson et al., 2012, p.1). Nordhaus (2011, p.2) also gave an additional - but important - term in

the language of mathematical programming that SCC means the shadow price of carbon dioxide

emissions at a point on a reference path of output. SCC combines scientific and socio-economic

model to determine the value of carbon dioxide emission impacts that later results an integrated

assessment model (IAM) (Guo et al., 2006, p.206).

SCC is a new and useful concept to be applied in economics and policy (Nordhaus, 2011, p.2). The

SCC can provide policy makers a guidepost to purpose for if they are searching an economically

efficient policy for carbon pricing (Nordhaus, 2011, p.2) and can be an important tool to determine

regulatory policies including greenhouse gas emissions (Nordhaus, 2017, p.1518). Havranek (2015,

p.6) also stated that if SCC was accounted precisely, policy makers could use the parameter to set the

optimal carbon tax. Van den Bergh et al., (2015, p.34) also gave further explanation that a carbon tax

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 Fikriyatul Falashifah
Master of Development Studies
Student Number: 300408737
Assignment 1 ENVI 528 Climate Change Issues

will enforce low-carbon electricity used and increase consumption of low carbon content goods.

Furthermore, the SCC can be applied for valuation purposes, such as placing a monetary value on

carbon sequestration.

Some argues that SCC is a domestic duty, considering its own country benefits (Fraas et al., 2016,

p.569). Others think that it must be a global duty, while all countries in the world need to cooperate to

reduce carbon emission, as declared in Paris agreement (Guivarch et al., 2017, pp. 1160-1161).

However, there is an updated approach of SCC from National Academy of Science in the United

States of America that might be useful for applying SCC at country level. For example, the US

government has using SCC concept for use in such areas as subsidies for the low carbon energy

installation and regulations requiring energy efficiency standards in buildings, motor vehicles, and

home insulation materials (Nordhaus, 2011, p.2). SCC is also used by The United States

Environmental Agencies (EPA, 2015, p.1), specifically to estimate the economic damages of one

metric ton carbon dioxide released to the atmosphere associated with net agricultural productivity,

human health, loss and damage in increasing flood risks and other systems. Other greenhouse gases

can also be measured by similar model in a unit price of ton per year (Hope et al., 2007, p.4).

The SCC itself can be estimated using Integrated Assessment Models (IAM) where the negative

impact of greenhouse gas emissions over a century are counted precisely (van den Bergh et al., 2015,

p.34). The IAM have some developed approach models such as Dynamic Integrated Climate and

Economy (DICE-2013); Regional Integrated model of Climate and Economy or RICE-2013

(Nordhaus et al., 2013, p.4); Policy Analysis of the Greenhouse Effect or PAGE (Hope et al., 2007,

p.4); and Climate Framework of Uncertainty, Negotiation and Distribution or FUND (Newbold et al.,

2010, p.2) in which all of them have their own procedure, assumption and equation.

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 Fikriyatul Falashifah
Master of Development Studies
Student Number: 300408737
Assignment 1 ENVI 528 Climate Change Issues

Several factors can influence the value of SCC, including discount rates (the higher discount rates, the

lower value of SCC), climate models, equity weighting on each studied country (the higher equity

weighting, so does the value of SCC), study time horizon (whether it will be short or long term

period), and mean vs median (Watkiss et al., 2008, pp. 90-91). Potensial increased of flooding risk

such as loss of agricultural productivity, damaged-property and lower human health are worthed to

account as well (EPA, 2015, p.1). But, based on EPA fact sheet, only key factors amongst others that

plays higher effect to valuing SCC: the discount rates (a rate used for discounting bills of exchange)

and the timing of releasing carbon emission.

However, SCC is often omitted from the practice. In reality, some countries avoid from attempting

emission reduction and rely on other countries to lower their emission. Some studies presume that

even the climate is changing, the society remain static (Tol, 2008, p.2). Also, the high uncertainty of

SCC, the controversial measurement methods and the country benefits of estimating SCC probably

can be other reasons why it is often neglected.

In some cases, many value judgements may distort the SCC. Some literature studies do not include

specific impact categories of carbon emission (Watkiss, 2005, p.3), also very few of them that

calculate any non-market damage and individual risks in terms of climate change adaptation. The

SCC tends to ignore interactions among impacts and high order on the economy and it frequently

depends on extrapolation from a few case studies. Practically, the SCC use simple models of

adaptation to climate change and neglecting uncertainties (Tol, 2008, p.2). Negative externalities, for

instance, examining past efforts to adjust gross domestic product (GDP), can also be one of value

judgements that can influence SCC when it uses GDP approach to estimate SCC. Too many

assumptions perhaps can be distortion in valuing SCC.

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 Fikriyatul Falashifah
Master of Development Studies
Student Number: 300408737
Assignment 1 ENVI 528 Climate Change Issues

Moreover, the models used to estimate SCC do not cover all of the key physical, ecological, and

economic impacts of climate change, probably because their lack of information details (EPA, 2015,

p.1). Weighting welfare of different levels can also meet ethical consideration (van den Bergh 2015).

From USA context, Hahn (2013, p.14) mentioned that SCC estimation should also include the benefit

of other countries where they doing business if the objective of SCC is for global welfare. Lack of the

monetary damage data of certain impacts such as fisheries, increased pest, disease, forest fire

pressures and other scarcity resulting from carbon emission can be other assumptions of SCC

limitation. Havranek et al (2015, p.6) also gave other borders that SCC calculation tends to depend on

trends and scenarios from other sources, which cause more complex processes. Then it has various

assumption about the level of current and future emissions, how current emission are converted into

atmospheric gas concentrations, climate sensitivity (related to global warming), and finally how this

warming is converted to economic damages. All of the limitation above makes the result of SCC vary

widely.

Price et al., (2007, p.2) said that the concept of SCC is different from carbon market price - which

reflects the value of traded carbon emissions rights to those in the market given the supply constrains

of these rights to emit imposed by current policy and the marginal abatement cost (or MAC).

However, MAC can be an alternative of SCC for two reasons. First, substantial uncertainties suggest

that other consideration should be input into global or national targeting-process, such as societal

tolerance for risk. The second is, reaching the global target probably will be any political influence

(Wolosin, 2014, p.6). A carbon price then is designed to achieve national ambition, not for reaching

global optimum value.

From the whole context and determination about SCC, it is clear that SCC plays important role to be

considered in such policy-making and environmental management, even though there are some

limitation and uncertainties. Socio-economic impacts resulted from carbon emission need to be

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 Fikriyatul Falashifah
Master of Development Studies
Student Number: 300408737
Assignment 1 ENVI 528 Climate Change Issues

calculated, wisely treated, and applied into global action to create global welfare and reach the global

goals.

Word Count: 1338 words