The Social Cost of Carbon and Carbon Taxes – Pick a number, any number

From the Executive Summary

Leaving aside its scientific and economic uncertainties, the government’s Social Cost of Carbon is so sensitive to input assumptions that small, quite reasonable variations can produce almost any price you wish. As a result it is not a suitable tool for guiding public policy, including taxes on energy. 

The U.S. Government requires that the benefits of any proposed regulation be greater than its costs to the economy. To make decisions in the energy sector, the Obama administration established a Social Cost of Carbon (SCC), which has been continued by the Trump administration. This price, currently set at $42, is an estimate of the discounted future costs to the world economy due to the atmospheric warming caused by a metric ton of carbon dioxide (CO2) emissions.

The scientists in the C02 Coalition strongly dispute that expected emissions of CO2 will cause dramatic increases in temperature and economic damage. Their review of government data from the past 30 years concludes that the “climate sensitivity” assumed by the SCC models — that a doubling of CO2 levels leads to a 3.5 degree Celsius increase in temperature — is much too high. Recent C02 Coalition White Papers show that any adverse effects of CO2 will likely be outweighed by its beneficial effects on plant growth and drought resistance, and by the health benefits of a warmer climate.

This White Paper, however, takes a different tack, demonstrating that even with the government’s assumed temperature increases and resulting damages the SCC is extraordinarily dependent on financial assumptions that have nothing to do with climate or economics:

  • The discount rate tells us how a “real” dollar (meaning one adjusted for inflation) in the future should be valued today. The choice of a discount rate is critical in evaluating potential damages that occur in the distant future. The SCC uses a discount rate of three percent per year, meaning that a real dollar that is available in one year should be valued at 1/1.03 or 97 percent of a dollar that is in hand, ready to use today. A real dollar two years from now would be worth 1/1.032 or 94 percent and so on.
  • The time horizon determines how far into the future we should attempt to calculate climate damages. Currently the government sets the SCC end year at 2300, 281 years from now. Most of the modeled damages occur far in the future, and we demonstrate that such projections are virtually impossible.

We show in this White Paper that using equally valid choices for the discount rate, such as five percent versus three percent, and for the ending year, such as 2100 versus 2300, reduces the SCC by 84 percent. Changing the discount rate further, to the seven percent used at times by the Office of Management and Budget, virtually eliminates the SCC, cutting it by 95 percent.

Download The Social Cost of Carbon and Carbon Taxes.

But readers do not need to take our word for it. The CO2 Coalition is a strong believer in the motto of Britain’s Royal Society, nullius in verba, “Don’t take anyone’s word for it.”  Below we provide an easy to use Excel spread sheet program (Appendix 1) that allows readers to change the discount rate and the ending year and, as “citizen economists,” see the impact for themselves.

This Excel model follows the logic of the social cost of carbon (SCC) calculations and produces similar temperature pathways and damage results. The model then allows easy testing of the impact of changing various assumptions.  Users can insert different values for discount rate, time horizon, and climate sensitivity, and see their impact on the SCC.

Appendix 1: CO2 Coalition Integrated Assessment Model (zip file)

Appendix 2: Social Cost of Carbon and Carbon Taxes – Electric Car Calculations

Appendix 3: Social Cost of Carbon and Carbon Taxes – Electric power generation calculations

The principal researcher for this White Paper is Bruce Everett,  Ph.D. During his 45-year career in international energy, Dr. Everett was an economist with the U.S. Department of Energy and an executive with ExxonMobil.  He taught energy economics at the Georgetown University School of Foreign Service and is currently an Adjunct Associate Professor of International Business at the Fletcher School of Tufts University.