Social cost of carbon: A revisit from a systems analysis perspective

Abstract

The social cost of carbon (SCC) is estimated by integrated assessment models (IAMs) and is widely used by government agencies to value climate policy impacts. Although there is an ongoing debate about obtained numerical estimates and related uncertainties, little attention has been paid so far to the SCC calculation method itself. This work attempts to fill the gap by providing the theoretical background and economic interpretation of the SCC calculation approach implemented in the DICE (Dynamic Integrated Climate-Economy) IAM. Our analysis indicates that the present calculation method is unable to reflect the linkages between two key IAM components—complex interconnected systems—climate and economy, both influenced by emission abatement policies. Within the modeling framework of DICE, the presently estimated SCC valuates emissions, which are beyond policy control, against consumption of products, which cannot be produced by the economy. This makes the SCC irrelevant for application in climate-economic policies and, therefore, calls for a replacement by a more appropriate indicator. An apparent SCC alternative, which can be considered for policy formulation, is the direct output of the DICE model, the socially optimal marginal abatement cost (SMAC), which corresponds to technological possibilities at the optimal level of carbon emissions abatement. In policymaking, because of the revealed SCC deficiency, great attention needs to be paid to the use of estimates obtained earlier.