The Marginal Damage Costs of Carbon-dioxide Emissions

Abstract

Abstract Estimates of the marginal damage costs of carbon-dioxide (CO2) emissions are a welcome input into policy advice. Never a prescription, marginal-damage-cost estimates provide guidance to the intensity of a policy, and provides transparency and consistency, and hence accountability to policy choices. To put it differently, marginal-damage-cost estimates reduce the arbitrariness of policy goals. In theory, the marginal damage costs should be equal to the tax on carbon, to the price of tradable permits, or to the marginal costs of emission reduction. In practice, the carbon tax (etc.) should not be too far from the estimated marginal damage costs because otherwise environmental and economic objectives would be too far out of step with each other. In that sense, an estimate of the marginal damage costs provides a yardstick for climate policy. At the same time, it allows for the coordination of climate, energy, transport, and other policies. This is important for economic efficiency, but also for accountability. Why would CO2 emissions from cars be treated differently from power plants emissions? Finally, in explicitly choosing a number, a government is forced to justify its policy and make public its deliberations on why it considers climate change to be a problem of a certain seriousness, but not more serious nor less serious.