Why the social cost of carbon will always be disputed

Abstract

Any social cost of carbon (SCC) calculated from an integrated assessment model of global climate‐economy interactions will always be disputed. This is because a key model input–namely the valuation of centennial climate damage–is highly unknowable for fundamental reasons discussed here. Problems with damage valuation are highlighted by the implicit implausibility to climate scientists of a leading model's (centennial) damage function, and by strong criticisms of damage functions by many climate economists. The claim that statistical analyses of past weather impacts on local economies, combined with structural modeling of sectoral impacts, can significantly improve centennial damage valuation rests on untestable, far‐out‐of‐sample extrapolation. Testing centennial climate (natural) science projections is generally harder than testing predictions in astronomy, geology and other earth sciences, because of Earth's uniqueness, and the unprecedented degree of likely climate change; but stable underlying laws make climate modeling based on past observations meaningful. By contrast, the added complexity of human behavior means there are no quantitatively stable laws for modeling the value of centennial climate damage. I suggest that any carbon prices used to inform climate policies, be they carbon prices used as policy instruments, or complementary, non‐carbon‐price policies, should instead be based on marginal abatement costs, found by modeling low‐cost pathways to socially agreed, physical climate targets. A pathway approach to estimating carbon prices poses challenges to many economists, and is no panacea, but it avoids any illusion of optimality, and facilitates detailed analysis of sectoral policies. This article is categorized under: Climate Economics > Aggregation Techniques for Impacts and Mitigation Costs Assessing Impacts of Climate Change > Evaluating Future Impacts of Climate Change

Carbon Capture for CO2 Emission Reduction in the Cement Industry in Germany

“…Under the Obama administration, the social cost of carbon was set for the United States at $45 per ton of carbon dioxide [44], which is below our avoidance costs. It is important to keep in mind that measuring the social cost of carbon is very complex [45,46]. Furthermore the concept of social cost of carbon is very contentious and values above 100 $/tCO 2 are not uncommon [47].…”

How to Comply with the Paris Agreement Temperature Goal: Global Carbon Pricing According to Carbon Budgets

“…Even though it is tried by IAMs, however, the SCC can neither be precisely determined nor predicted (cf. [16,34]) due to the complexity of the systems involved and the resulting problems in modeling those systems, the incompleteness of the available information, the limited resources to calculate these estimates and the uncertainties concerning the given information. Similar fundamental problems arise in the process of determining or predicting the marginal abatement costs.…”

“…[35,42,70,71]), is not confirmed by the latest scientific findings on climate change. The social cost of carbon is uncertain across a broad range and will always be disputed [16,72]. "The literature agrees that damages are a convex function of temperature, but the degree of the convexity is an open issue, inevitably subject to uncertainty; see, for instance, [73]" [74].…”

“…The proposed reduction paths could in principle be validated by integrated assessment models (IAMs) to ensure low-cost pathways that achieve, physical climate targets that are socially agreed upon. However, such costs are highly uncertain [16].…”

Modeling Myths: On the Need for Dynamic Realism in DICE and other Equilibrium Models of Global Climate Mitigation

“…Most of the DICE-related literature focuses upon the estimation of global damages, often critically. A recent review (Pezzey, 2019) suggests this may be a futile task, in the sense that there may be no objective, globally acceptable answer given profound challenges in estimation including uncertainty, risk, equity and aggregation over space and time. That surely will not stop the effort.…”