Accounting for equity in social cost calculations has huge consequences.
I have been really uncool for most of my life and continue to be proud of that fact. All the “cool” kids on twitter these days are railing about how carbon pricing has failed (which it hasn’t), and how the social cost of carbon is useless (it isn’t). Well, I don’t care. Mullets were briefly considered to be cool again, and I continue to maintain that they were a #haircutfail. The social costs of carbon and methane will continue to play an important part in helping us figure out which policies pass a benefit cost test and which ones don’t. This has to be an integral part of our road to net zero, no matter whether it makes your mullet curl or not.
The literature on how to calculate the social cost of carbon is slowly evolving in some non-mainstream field journals in economics, but much more rapidly in the general science literature. This is good, as there is real climate science involved in the calculation of these numbers and economists left alone will gladly violate one or multiple laws of thermodynamics without knowing they did.
While the Social Cost of Carbon has been getting all the attention, its little sibling – the Social Cost of Methane (SCM) – has been one of the big “unknowns” in this literature. EPA had cobbled together a number, which stood up to scrutiny, but a recent publication by a group of Berkeley folks in and around the lab led by David Anthoff in the journal of journals – Nature – just engaged the Warp drive.
Here’s a quick refresher. Methane is a potent greenhouse gas that comes from both ends of a cow, leaky natural gas pipelines, landfills and wastewater treatment, to name but a few anthropogenic sources. It is invisible and a much more potent greenhouse gas than its famous cousin- CO2. Its lifespan, once released, is also much shorter. For those of you that run, in terms of performance as a greenhouse gas, this is similar to comparing Usain Bolt to Eliud Kipchoge.
The above mentioned paper makes some significant headway in the modelling of the physical impacts of methane on the climate system, which to this guy is important but about as exciting as watching grass grow, because I lack the training and appreciation for it. Specifically, they update the model to account for the recent 25% upward revision of the radiative forcing of methane. They also do a bunch of really cool new modelling stuff around hindcasting (checking how well your model predicts the past) and built in a Bayesian framework – nerd alert!
But what got my interest is what the authors do with respect to Equity Weighting (EW DAVID!!!!). What is Equity Weighting you ask? Imagine a world with rich people and poor people. Newsflash, you live in this world and the inequality is getting worse by the day! The thought experiment is one where a given consumption loss (from climate change for example) causes a bigger loss in well-being to a poor person than a rich person. Equity weighting recognizes this and assigns a higher weight to climate damages occurring to low income folks (actually, low income regions like sub-Saharan Africa).
Is this crazy Berkeley kumbaya stuff? No! This is consistent with standard economic theory. Also, is this some absurd tool, no one uses? Nein! The German government actually employs an equity weighted social cost of carbon.
How do you do this? It’s actually non trivial and really cool. In a setting with uncertainty (such as settings where the future is involved), you can play with a parameter called the “normative parameter of inequality aversion”, which sort of determines how big the relative losses in welfare are to individuals with different levels of wealth from a reduction in consumption. Or in plain language, it determines how much more screwed you are in dollar terms from a consumption loss if you’re poor versus if you’re rich. So what the model does is that it calculates the marginal damages from one additional ton of methane in each region and then assigns more weight on the damages in low income regions when we add them all up – for a variety of values of this “normative parameter of inequality aversion”. Once you do this, you can calculate an “equity weighted SCM”.
There is one more super nerdy choice the modeller needs to make, which relates to normalization (or in econ terms, picking the numeraire good). If you pick consumption in high-income areas as the numeraire good, you get a higher $ number for the SCM. So, when we express the SC-CH4 as the welfare equivalent loss of consumption in the US we get a higher number than if we express it as the welfare equivalent consumption loss in Sub-Saharan Africa. So if you read the paper and you see “US numbers” and “Sub Saharan Africa numbers”, David Anthoff reminded me on twitter that these US numbers are NOT “damages that occur in the US” but rather “world damages expressed as the welfare equivalent consumption loss in the US”.
So what happens if you do this. It turns out a lot! Accounting for these societal concerns about equity results in SCM numbers that differ by more than an order of magnitude (fancy speak for ten-fold) between low- and high-income regions! Why is this important? If we take a single number for the entire world, we would compare the cost of emissions to the same number – no matter whether you are in the rich US of A or the not so rich countries of Sub Saharan Africa. Equity weighting creates heterogeneity here, which results in higher-cost opportunities for methane reduction being the right thing to do for a rich country, because the dollars spent on it don’t hurt as much.
So why should we care about this? My mullet wearing friends may like this approach as equity weighting generates higher numbers for the SCM. But we should aspire to be more correct, rather than simply seeking a higher number. This paper certainly does that. It is interdisciplinary science at its very best. For the super nerds here, check out the supplemental information… It’s amazing work.
But to me, the most convincing argument is simply an ethical one, where an equivalent loss in consumption to a poor person is more damaging to a poor person than a rich person. Benefit cost analyses should incorporate this IMHO. If one had higher resolution models, calculating a equity weighted global SCM would also create a relative benefit for the poorer areas of the US that are also likely to see the largest climate impacts. Before I wrote this blog post, I thought about consulting a philosopher about this, but then recalled that David Anthoff is one by training (he turned to economics later in life!).
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Suggested citation: Auffhammer, Maximilian. “Shouldn’t We Weight?” Energy Institute Blog, UC Berkeley, May 17, 2021, https://energyathaas.wordpress.com/2021/05/17/shouldnt-we-weight/
Maximilian Auffhammer is the George Pardee Professor of International Sustainable Development at the University of California Berkeley. His fields of expertise are environmental and energy economics, with a specific focus on the impacts and regulation of climate change and air pollution.