The social cost of carbon: implications for modernizing our electricity system

Abstract

The US government must use an official estimate of the “social cost of carbon” (SCC) to estimate carbon emission reduction benefits for proposed environmental standards expected to reduce CO2 emissions. The SCC is a monetized value of the marginal benefit of reducing one metric ton of CO2. Estimates of the SCC vary widely. The US government uses values of $11, $33, and $52 per metric ton of CO2, classifying the middle value as the central figure and the two others for use in sensitivity analyses. Three other estimates using the same government model but lower discount rates put the figures at $62, $122, and $266/ton. In this article, we calculate, on a cents-per-kilowatt-hour basis, the environmental cost of CO2 emissions from fossil fuel generation and add it to production costs. With this, we compare the total social cost (generation plus environmental costs) of building new generation from traditional fossil fuels versus cleaner technologies. We also examine the cost of replacing existing coal generation with cleaner options, ranging from conventional natural gas to solar photovoltaic. We find that for most SCC values, it is more economically efficient (from a social cost–benefit perspective) for the new generation to come from any of these cleaner sources rather than conventional coal, and in several instances, the cleanest sources are preferable to conventional natural gas. For existing generation, for five of the six SCC estimates we examined, replacing the average existing coal plant with conventional natural gas, natural gas with carbon capture and storage, or wind increases economic efficiency. At the two highest SCCs, solar photovoltaic and coal with carbon capture and storage are also more efficient than maintaining a typical coal plant.