The social cost of carbon (SCC) is an extremely important tool for understanding our global climate change situation and determining the most cost-effective solutions. However, many people do not fully comprehend it, so this article will explain what it is and how it is used to build better environmental policies.

What is the Social Cost of Carbon?

Simply put, the social cost of carbon (SCC) is a calculation, in dollars, of how much damage is caused by one ton of greenhouse gasses released into the atmosphere. It was developed to assist in the cost-benefit analysis of governmental policies.

When the Biden Administration reinstated the Interagency Working Group (IWG) in charge of determining the SCC, it was reset at $51 per ton.

The History of the Social Cost of Carbon

Economic cost-benefit analysis has been an essential part of lawmaking since the Regan administration. Including the future costs of climate change in that analysis became standard after the Center for Biological Diversity (CBD) sued the National Highway Traffic Safety Administration over new fuel economy standards in 2008.

The CBD won the case since the policy decision in question did not take into account the effects of greenhouse gas emissions, assuming them to be zero. Since then, the government has been required to consider both the costs of greenhouse gases and the economic benefits of new policies when conducting economic analyses.

Obama Administration

Initially, different government agencies would operate using their own SCC estimates. During the Obama presidency, the Office of Management and Budget established an Interagency Working Group on the Social Cost of Carbon. This group created a standardized SCC estimate that could be used throughout all government agencies and worked to develop standards ensuring that the SCC would remain rooted in science and guided by expert scientists and economists.

Changes Over Time

The Trump administration disbanded the IWG and changed how the SCC was calculated, so their estimate ($3-5 per ton) was significantly lower than the Obama administration’s estimate ($43). The Biden administration reinstituted the IWG and announced its administration’s SCC estimate of $51 per ton, which is more in line with the original IWG parameters.

The SCC is currently used throughout the federal government, as well as by several state governments.

How is it Calculated?

Scientists create an integrated assessment computer model to calculate the SCC, which is then used to track the atmospheric changes that an added ton of carbon could cause.

This occurs over four steps:

Calculate the current trajectory of carbon dioxide emissions based on factors such as population and economic growth.
Model the climate changes, including precipitation, temperature, and sea level, that would be observed from the carbon emissions trajectory.
Determine the economic impact of these environmental factors, considering effects on agriculture, health, energy use, etc.
Convert the future costs to present-day values and add them up for the total cost.

These steps are undertaken once using current statistics and then again with an added ton of carbon dioxide to determine the difference in cost.

How is it Used?

This calculation is primarily used by lawmakers to see if policies intended to reduce carbon footprints are worthwhile investments. The SCC has also been used in some cases to calculate carbon taxes.

When analyzing a given policy’s costs and benefits, lawmakers can easily take the tons of carbon emissions that the policy would add to or remove from the atmosphere and multiply it by the SCC to see the projected changes in monetary terms.

As an example, say government officials are considering a bill that would build a public transport system. The construction of the transportation infrastructure would be quite expensive, and the economic benefits of people paying to use the system may not balance out the initial investment costs for many years.

But using the SCC, decision makers could include the monetary value of long-term social, health, and environmental benefits from fewer people driving their vehicles. Adding in the SCC allows them to see more accurately how long it would take for this project to pay for itself or, in economic terms, for the benefits to equal the costs.

These calculations give a more accurate view of which projects will be worthwhile investments and contribute to reduced carbon emissions while also promoting a healthy economy.

Why is it Important?

The SCC is valuable because it helps us determine if the social, environmental, and health benefits of a project are worth the economic investment it requires. It allows us to more clearly compare these differing factors through a single, monetary lens. Then better determine what costs are worth it to improve the environmental situation.

The Social Cost of Carbon and the Fight Against Climate Change

While the social cost of carbon is a relatively new development in the world of policy-making, it is an integral tool in the fight against climate change. It helps government officials make decisions that are beneficial to both the environment and the economy.

Hopefully, more widespread knowledge and adoption of the SCC across the US will help expedite the implementation of environmentally friendly policies and help us reach our emissions reduction goals.

Contact us with any questions you may have on how you can reduce emissions in your personal life or business operations.

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