Abstract
AbstractThis note considers the treatment of risk and uncertainty in the recently established ‘social cost of carbon’ (SCC) for analysis of federal regulations in the United States. It argues that the analysis of the US Interagency Working Group on Social Cost of Carbon did not go far enough into the tail of low-probability, high-impact scenarios, and, via its approach to discounting, it mis-estimated climate risk, possibly hugely. Given the uncertainty about estimating the SCC, the note concludes by arguing that there is in fact much to commend an approach whereby a quantitative, long-term emissions target is chosen, and the price of carbon for regulatory impact analysis is then based on estimates of the marginal cost of abatement to achieve that very target.
Highlights
In this note I offer some comments on the recently established ‘social cost of carbon’ (SCC) for analysis of federal regulations in the United States (Interagency Working Group on Social Cost of Carbon, 2010)
Drawing on experience in the UK, I argue that, given the uncertainty about estimating the SCC, there is much to commend an approach whereby a quantitative, long-term emissions target is chosen, and the price of carbon for regulatory impact analysis is based on estimates of the marginal cost of abatement to achieve that very target
It pointed out a basic mistake in the way the Working Group performed discounting, which must be rectified in future: by imposing an exogenous, constant discount rate in the tradition of simple discounted cash flow analysis, the effect of low-probability, catastrophic consumption losses on the SCC is likely to have been significantly underestimated
Summary
In this note I offer some comments on the recently established ‘social cost of carbon’ (SCC) for analysis of federal regulations in the United States (Interagency Working Group on Social Cost of Carbon, 2010). While thorough in some respects, I argue that the analysis of the Interagency Working Group on Social Cost of Carbon did not go far enough into the tail of low-probability, high-impact scenarios. This immediately raises questions about the treatment of risk and uncertainty in benefit-cost analysis. The introduction of an SCC is a potentially significant step in the development of US climate-mitigation policy, especially in the continuing absence of dedicated, overarching mitigation policy instruments whose costs to individuals and firms could more directly enter benefit-cost calculations in other policy areas
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