Carbon and cost

Previous posts have referred to the estimated costs of local decarbonisation programs, such as that of Bristol. A natural response to such plans is to ask what would happen if no action were taken, and to try to express the results of inaction in monetary terms. Unsurprisingly this question is not easy to answer, and this post will attempt no more than to indicate some of the issues and relevant literature.

The costs of failure to control climate change might arise from damage and disruption due to extreme weather events, coastal erosion, the spread of disease, or reduced food supplies, although effects will differ from region to region. One measure that has been used in examining such effects is the social cost of carbon (SCC). This has been defined as “a metric designed to quantify and monetize climate damages, representing the net economic cost of carbon dioxide emissions to society” [1]. SCC figures are intended to help in evaluating whether a policy intended to control climate change can be justified, and have been used in a number of states in the USA, for example in the New York State Climate and Community Protection Act [2].

One of the means used to set a value for SCC in the USA is the Dynamic Integrated model of Climate and the Economy (DICE), developed by W. D. Nordhaus. His 1991 paper [3] “presents a simple approach for analyzing policies to slow climate change” and could provide a useful introduction to terminology. Its conclusions that the “flow of damages identified from this climate change is estimated to be about ¼ % of output for today's United States economy … or at most 2% of total global output” have been the subject of criticism and later modification. A revised DICE model (DICE-2016R) gave a figure for the economic cost caused by an additional ton of carbon dioxide equivalent emissions of $31 per ton of CO2 for 2015, rising at 3% per year over the period to 2050 [4].

A meta-analysis of global climate damage describes SCC as a primary tool for calibrating socially optimal policy response to climate change under the Obama Administration but refers to “the vast uncertainty surrounding climate impacts” [5].  It found that previous meta-analyses contained significant biases, and its own methodology estimates “a three- to four-fold increase in the 2015 SCC relative to DICE” and that when “catastrophic impacts are also factored in, the SCC increases by four- to five-fold.” In terms of GDP, a 3 degree C increase from the pre-industrial period is likely to produce non-catastrophic damages of between 7 and 8% of GDP, and between 9 and 10% when catastrophic risks are included.

The uncertainties surrounding the social cost of carbon were described in 2005 in a British report as spanning “at least three orders of magnitude, from 0 to over 1000 £/tC, reflecting uncertainties in climate and impacts, coverage of sectors and extremes, and choices of decision variables” [6].

In 2009, a revised approach to valuing carbon was put forward by the UK government, in which “the precise valuation methodology differs according to the specific policy question being addressed” [7]. The approach was to base individual policies on “explicitly target-consistent” values of carbon, and these depended on factors such as whether the European Union Emissions Trading System did or did not apply, and whether targets were short or long term. The new values proposed ranged from a minimum of £14 per tonne for a short term traded price in 2020, to a maximum of £300 per tonne for a long term traded price in 2050.

The methodology was explained further in 2012 [8], where Annex A refers to a model which “estimates prices of allowances based on equilibrium between demand for and supply of abatement over the period up to 2030”, and to the “top-down global sectoral model for the world energy system” (POLES) upon which the analysis rests [9].

In 2019 BEIS published updates to the short-term figures [10]. These give low, central and high figures for the years 2018 to 2030; for 2020 they are respectively 0, 13.84 and 27.69 £/tCO2e, and for 2030, 40.41, 80.83 and 121.24 £/tCO2e. The report warns that the figures should not be considered as “forecasts” of future prices. Links to related UK government publications are provide by BEIS [11].

More general information on the cost of carbon may be found at Wikipedia [12, 13, 14], and at CarbonBrief [15].

In view of the uncertainties referred to above, in might seem unwise to attempt to put a figure on the cost of uncontrolled climate change in a particular situation, such as that of Bristol. However the estimated cost of a proposed decarbonisation program can be used, together with the carbon saving envisaged, to produce a figure for the cost per tonne of carbon that will actually be paid if the program is carried out as planned. Comparison of this figure with those derived from the plans of other cities or regions might then be useful.

References

[1] The Cost of Carbon, Institute for Policy Integrity, New York University School of Law https://costofcarbon.org/

[2] New York State Climate and Community Protection Act (Bill A10342).

https://assembly.state.ny.us/leg/?default_fld=&leg_video=&bn=A10342&term=2015&Memo=Y&Text=Y

[3] To slow or not to slow: the economics of the greenhouse effect

W.D. Nordhaus

The Economic Journal, 101 (July 199I), 920-937

http://pinguet.free.fr/nordhaus1991.pdf

[4] Revisiting the social cost of carbon

William D. Nordhaus

PNAS February 14, 2017 114 (7) 1518-1523 https://doi.org/10.1073/pnas.1609244114

[5] Few and Not So Far Between: A Meta-analysis of Climate Damage Estimates

Peter H. Howard1 and Thomas Sterner, 2017, Environ Resource Econ DOI 10.1007/s10640-017-0166-z

https://policyintegrity.org/files/publications/HowardSternerMetaanalysis.pdf

[6] Social Cost of Carbon: A Closer Look at Uncertainty

Stockholm Environment Institute, DEFRA, 2005

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/243814/sei-scc-report.pdf

[7] Carbon Valuation in UK Policy Appraisal: A Revised Approach

Climate Change Economics, Department of Energy and Climate Change                July 2009

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/245334/1_20090715105804_e____carbonvaluationinukpolicyappraisal.pdf

[8] Updated short-term traded carbon values used for UK public policy appraisal

15 October 2012

Department of Energy & Climate Change

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/245385/6667-update-short-term-traded-carbon-values-for-uk-publ.pdf

[9] POLES: Prospective Outlook on Long-term Energy Systems

Enerdata intelligence and consulting

https://www.enerdata.net/solutions/poles-model.html

[10] Updated short-term traded carbon values used for UK public policy appraisal

BEIS, 2019

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/794186/2018-short-term-traded-carbon-values-for-appraisal-purposes.pdf

[11] Carbon valuation

BEIS, Last updated 11 April 2019

https://www.gov.uk/government/collections/carbon-valuation--2

[12] Social Cost of Carbon, Wikipedia

https://en.wikipedia.org/wiki/Social_cost_of_carbon

[13] Carbon emission trading, Wikipedia

https://en.wikipedia.org/wiki/Carbon_emission_trading

[14] Carbon Trade Watch, Wikipedia

https://en.wikipedia.org/wiki/Carbon_Trade_Watch

[15] The Social Coat of Carbon, CarbonBrief

https://www.carbonbrief.org/qa-social-cost-carbon