What do 51.5, 1, and 190 all have in common? There’s no obscure mathematical connection: these are the three values of the social cost of carbon (SCC) as calculated by the Obama, Trump, and Biden administrations respectively.
What is the SCC, and why is it that three different sets of economists can come up with such a wide range of estimates for exactly the same value?
Why does it matter?
The SCC is one way we can try to correct an externality in the energy market. All else equal, producers and consumers of energy would often prefer to purchase the cheapest form of energy possible, which tends to also cause a lot of pollution. This means that people who do not pay the cost of buying electricity or producing electricity end up paying the cost of climate change even though they are not a part of the energy transaction. In a well-functioning market, producers and consumers are the only people impacted by a transaction. In this case, future generations and people in more climate-vulnerable environments take on the externality cost of carbon emissions–higher temperatures, heavier precipitation, and rising sea levels due to climate change.
Considering this bigger picture, we can surmise it would be socially optimal for a larger portion of the energy bought and sold to come from non-polluting sources.
Normally when there is some negative externality in a market, a government can impose some tax on it to bring the private cost of a good up to the social cost of the good and reduce consumption of that good. In the case of energy, this process would lead to other non-polluting sources of energy becoming relatively more affordable.
The SCC tells us how much damage an additional ton of carbon dioxide emissions causes. This is a guideline that we can follow to better understand when different policy options to reduce emissions are cost-effective.
Why such a big range?
There are many differences between the various calculations for the social cost of carbon, but the most important difference is whose damages count. Deciding whose costs to count in policy analysis is one of the most important decisions to make.
This part of policy analysis is called defining standing. When we define who has standing, we are asking whose costs and whose benefits we are looking at. The SCC example illustrates two of the most common ways of defining who has standing: when everyone has standing and when the people within some set jurisdiction have standing.
In practice, this leads to differences in the estimates for the SCC because the Trump administration only counted damages to Americans. The Biden and Obama administrations calculated the worldwide costs of additional carbon emissions. The newest estimate for the SCC relies on methodological changes to the way that socioeconomic factors, climate factors, and discounting is incorporated. These updates reflect a better understanding of the impacts of climate change and provide a better picture of the total costs.
International bodies enforcing sanctions on nations is a much more significant task than a local government enforcing a sanction on a single producer. Self-imposed policies driven by estimates of the SCC might be the only way to counteract global climate externalities caused by carbon emission.