Tipping Points and the Social Cost of Carbon

Economists talk about something called the “social cost of carbon.” Here’s the basic idea: You may pay for the gas you put in your car, but when you burn it, you emit carbon dioxide, which imposes costs on the rest of society by accelerating the pace of climate change. The social cost of carbon, measured in dollars per ton of emitted carbon, measures this cost.

In 2010, a US government panel decided that a reasonable estimate of the social cost of carbon was $21. Federal agencies now incorporate this number in analyses of the effectiveness of different regulations. For instance, the justification for the recent increases in fuel economy standards reflected this number.

Complicated models, and likely some political considerations, underlie the government’s social cost of carbon, but it has always struck me as low. Are we really getting so worked up about climate change if we could address it by raising the price of gasoline by less than twenty cents a gallon?

I was reminded of the government’s low social cost of carbon estimate when I tried to explain the potential costs of climate change to my 9-year-old daughter this summer. She was enjoying swimming in unusually warm ocean water near her grandparents’ house in Maine, but I pointed out that warm water might be a sign of climate change. I tried to make the dangers real, noting sea levels rising up to her grandparents’ cottage and dying coral. “So?” she asked, innocently.

“So?” indeed. Isn’t it for our children’s generation that we’re trying to slow down climate change? But, setting the social cost of carbon at $21 a ton strikes me as a collective, “So?” to climate change. There are some costs, but they’re not that big a deal.

I was recently at a conference in Sweden where a post-doc from Germany, Thomas Lontzek, presented a paper that suggests the actual social cost of carbon is substantially higher. He argued that the models underlying the current Federal number are missing a fundamental component: tipping points.

Tipping points capture the idea that with every extra ton of carbon we emit, we’re increasing the chances of irreversible changes to the earth’s systems that could lead to very, very large costs in the future.

Here’s one example of a tipping point that captures both the irreversibility and the feedback-loop (domino) effects. Scientists have shown that the ice sheets in Greenland and West Antarctica are melting because of climate change, and they forecast that the pace at which the ice disolves will accelerate and eventually become irreversible. The melting will likely lead to rising sea levels that could threaten coastal cities, like New York City. (See this recent New York Times article, which notes that New York City is second only to New Orleans in the number of people living less than four feet above high tide.) Also, the melting will likely lead to further warming since converting white, snow-covered ice to water means that less of the sun’s heat is reflected back to space.

Lontzek and his co-authors’ calculations suggest that if there’s even a small probability that the rising levels of carbon in the atmosphere lead to irreversible, damaging shifts, we should be willing to pay a lot now to lower that risk. In other words, the social cost of carbon is likely much higher than $21. Some of Lontzek’s estimates suggested about three times as high, and some significantly higher.

There is still considerable uncertainty about how to measure tipping points. Climate scientists’ estimates of the probability of tipping vary dramatically. In addition, the costs of crossing a climate threshold remain hard to evaluate. Lontzek’s model assumes that tipping points reduce world economic output between 2.5 and 20 percent, which is not the only way to capture the effects in the future. A colleague of mine at Berkeley, Christian Traeger, has a model that generates the damages associated with crossing a tipping point directly from the underlying changes in the climate and comes up with lower estimates of the impact on the social cost of carbon, though still a 50 percent increase.

Nevertheless, the call to action is clear: slow down the process now, before irreversible, damaging changes really get going.

About Catherine Wolfram

Catherine Wolfram is the Cora Jane Flood Professor of Business Administration at the Haas School of Business, Co-Director of the Energy Institute at Haas, and a Faculty Director of The E2e Project. Her research analyzes the impact of environmental regulation on energy markets and the effects of electricity industry privatization and restructuring around the world. She is currently implementing several randomized control trials to evaluate energy efficiency programs.
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5 Responses to Tipping Points and the Social Cost of Carbon

  1. Pingback: Tipping points and the social cost of carbon | Veille énergie climat

  2. george says:

    Small note: Not all carbon released into the atmosphere has the same social cost. Some biofuels offer the potential of no (or smaller) _net_ addition to carbon in the air.

  3. Catherine Wolfram says:

    Good point. When I think about net carbon cases, though, I find it easier to adjust the tons of carbon emitted, not the social cost per ton.

  4. Jan G says:

    Actually there is another point – CO2 has a higher social cost than just from the GHG impact, since it acidifies the oceans (whereas methane and HFC’s do not – and HFC’s have their own added cost stream from ozone depletion).

  5. Mahesh Bhave says:

    I would like to know the cost of carbon linked to per individual usage by country, and broken down by electricity in home use, driving an automobile, traveling by air, … how much would my electricity bill rise if cost of carbon was baked into it? How much does the burning of natural gas contribute to the cost of carbon in my utility bill? Tons of carbon is too difficult to correlate to daily living, and makes the pedagogical and the policy challenge, and even more the business challenge, much harder.

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