Beyond the Social Cost of Carbon: The Real Economic Lessons About the Determinants of Harm from Changing Climate and Their Implications for Climate Policy

Abstract

As a measure of the marginal benefits of EPA regulations mandating reductions in greenhouse gas emissions, the social cost of carbon (SCC) has been important in the regulatory process leading to the finalization of such regulations. In this paper, I explain and critique the Integrated Assessment Models from which the SCC is derived, and in particular the climate damage functions IAM’s assume and which are at the core of SCC estimates. Climate damage functions should be based on empirical evidence regarding the actual contribution of temperature, precipitation and other climate variables to various measures of human well-being, such as agricultural productivity, health, wildfires, and civil war among many others. Simple empirical studies that focus solely on climate measures tend to overestimate, sometimes vastly, the role of climate as a causal factor in such phenomena. More complex studies that look at the entire range of variables theoretically identified as important in explaining the phenomenon of interest show that climate is much less important as a causal factor than simple “climate and...” studies estimate. In addition, IAM damage estimates are based on estimates from computer and analytical models of climate sensitivity (the temperature increase to be expected from GHG increases), but such estimates are higher than newer, empirical estimates. Moreover, IAM damage estimates do not take account of the extremely long multi-centennial period over which climate sensitivity evolves to higher values. For all of these reasons, SCC estimates used in regulatory proceedings today are likely considerable overestimates of the actual SCC. Reasonable estimates of the SCC support only modest reductions in GHG emissions. Regardless of GHG emission reductions, climate commitment means that adaptation to future climate change will be a necessity, and the empirical literature suggests that climate change policy should focus on removing public policies that create perverse incentives not to adapt and on promoting policies that increase the incentive for the development of new ways of adapting to inevitably changing climate. Unfortunately, the promulgation of GHG emissions regulation under the Clean Air Act, a statute that does not mandate cost benefit analysis, makes it unlikely that a court will ever seriously question the methodology underlying flawed SCC estimates that have already been used to justify GHG emission regulation. While potentially a valuable tool for climate policy design, as employed in actual regulatory impact analysis in the United States, the SCC has been used to justify inefficient policies rather than to identify better ones.