More Boo In CO2
A new paper suggests Carbon Dioxide causes thrice the damages previously used by the US government.
The third floor of the newly seismically retrofitted Giannini Hall at Berkeley is an awesome place to be, if you care about one of the more obscure numbers in existence: The Social Cost of Carbon. The SCC is the damage one ton of CO2 does over its long lifetime across all sectors and the entire planet. The sheer number of nerds obsessed with how this number is calculated, permanently located, or visiting this single hallway makes it a super fun place to be – for those nerds. The level of excitement in response to the release of a new paper led by the younger German economist on this floor was significantly higher than when the Warriors deservedly won the NBA championship last year. Sorry Boston, but you know it’s true.
One of the biggest contributions (at least I think so) of economists to public policy is the required application of Benefit Cost analysis for a significant share of federal regulations since the 1970s (or 1993 depending on how you feel). If federal agencies want to impose a new regulation, often they have to show as part of a regulatory impact analysis that the benefits of the regulation (e.g. avoided pollution damages from lower energy consumption due to energy efficiency rules) are greater than the costs (higher cost of manufacturing said more efficient gadgets).
Since basically every human activity causes some greenhouse gas emissions, the damage a ton of CO2 does is key. There is a long history of using this number going back to the Bush II presidency when NHTSA, EPA, and DOE applied three very different numbers for the same gas emitted. During the Obama presidency, an interagency working group produced an official number, which was then $42 per ton emitted in 2020 using a 3% discount rate.
Let’s skip the bad economics that happened under President Trump. President Biden in the first month in office put in place a slightly updated SCC, which was $52/ton and ordered a significant update, which was supposed to take into account the suggested improvements by the National Academies of Science and Engineering.
The new paper by led by David Anthoff and Kevin Rennert presents the results of this immense amount of work conducted mostly during the Trump years with a team organized out of RFF composed of a team of future all stars (shoutout to Frank Errickson, Lisa Rennels, and Cora Kingdon) and current all stars (who do not need a shoutout). Because we have all read the Lord of the Rings too many times, the global press focused on the number that rules them all: The new central estimate of $185 per ton of CO2 which is more than thrice the current number (at a 2% risk free rate used to discount). Extra, extra, read all about it! Bigger numbers! Yuge! RaRaRa. Sure. But here is what I love about this paper:
- It lives in the light. I mean it’s all open source. If you can program in Julia (which you can learn in a weekend if you know some Python or R) you can modify the model in any way your little heart desires. You can add stuff. Subtract stuff. Change stuff. Make it yours in any way you want. While Richard Tol will remind me that the great grandparents of the new model (DICE and FUND) also lived out in the open and that Fran Moore (currently in the White House) dragged the third (PAGE) into the light, I would like to remind us that most of the components of these older models were calibrated when Counting Crows were topping the charts. Counting who? Exactly.
- The damage functions are updated and account for some adaptation. There are four sectors in the model: agriculture, energy, sea level rise, and mortality. The damage functions, which translate a changed climate into changed welfare have been at the focus of the recent empirical economics literature and this effort draws heavily from this literature (the Climate Impact Lab at Berkeley/Chicago/Rhodium/Rutgers has a parallel effort with a different approach). Why does this matter? For some of the older models, the damages on the agricultural and energy sectors were not consistent with the most recent literature. The update changed the relative contributions of these sectors.
- The paper makes a significant update to discounting. I am not going to get into the technicalities here, but there are two things. First, the paper employs a 2% risk free rate, which is lower than the lowest rate used before and is consistent with recent peer review top journal yadda yadda expert elicitation. The second update is that discounting now takes into account the rate of economic growth, which is key if you are a Ramsey kind of person (sorry for the nerd lingo) and care about pricing risk correctly.
- The coolest thing, however, IMHO, is the full characterization of uncertainty. Soup to Nuts. These models require many things. The first thing you need is future emissions based on income and population assumptions. In the old days, we just put together a handful of scenarios that seemed reasonable and did not really attach probabilities to earths with different levels of wealth and population. This paper went bonkers on this by combining some cool new econometrics on really long run forecasts with expert elicitation to characterize future states of the economy probabilistically! This sounds straightforward, but it’s not and this alone would have been a major step forward.
- They do not stop there. The authors update the climate model to reflect current scientific understanding, a damage component, and a discounting module. Each of these has its own source of uncertainty – some related to assumptions about the future, some related to assumptions about parameters. But this new model (GIVE) allows us to take into account the change in uncertainty and translates this into a distribution of the SCC taking these different sources of uncertainty into account. So. Flipping. Cool.
There is a bunch of other neat stuff in here. And some Debbie or Donald Downers in the comments and on Twitter are gonna spread some hate with respect to what the authors should have done to satisfy their own priors. But. I am going to put a few things out there that we should push hard on to better characterize the social cost of carbon.
- There are literally hundreds of sectors out there possibly affected by climate change. This model contains four. Granted these are probably the most climate sensitive ones we know something about. Yet, I want us to push hard on non-market and non-market”ish” damages like species loss, forests, water availability, conflict, migration. There are some really cool folks like Hannah Druckenmiller working on these issues, but this is an all hands on deck kind of situation. Get to it.
- I still do not understand why we do not put the equity weighted Social Cost of Carbon center stage? We keep on talking about environmental justice like we know what we are talking about and care, and then we focus on the non-equity weighted number. I have written about this before and my inbox was full of “Woah. This is cool. How do I do that?” We know that the Germans use an equity weighted SCC, which David Anthoff was involved in calculating. So I really hope that David will not get distracted by the disaster that is currently unfolding in our favorite Fussball Team and provide us with an equity weighting module.
- We have little to no handle on fat tail risks (really big catastrophic events with non-zero probabilities. Pick your poison.) I continue to think that we may want to contemplate some “Weitzman disclaimer” to any SCC we deploy in Benefit Cost Analysis. To quote one of my heroes from his superb 2009 paper: “Perhaps in the end the climate-change economist can help most by not presenting a cost-benefit estimate for what is inherently a fat-tailed situation with potentially unlimited downside exposure as if it is accurate and objective? […] Even just acknowledging more openly the incredible magnitude of the deep structural uncertainties that are involved in climate-change analysis and explaining better to policymakers that the artificial crispness conveyed by conventional IAM-based CBAs here is especially and unusually misleading compared with more ordinary non-climate change CBA situations might go a long way toward elevating the level of public discourse concerning what to do about global warming.”
This last point is what keeps me awake at night. A graduate student walked into my office and asked me “How do I model and learn about something that has not happened in the past but might happen in the future?” Our friends in climate science have literally spent billions of dollars on this question. We economists in the climate landscape have mostly focused on learning from measurable things in the rearview mirror, which is what the toolkit-du-jour is geared towards. But I worry that in a world without the great Marty Weitzman in it, we are not sufficiently nudged to encourage this graduate student and her peers to pursue these all important questions.
Keep up with Energy Institute blog posts, research, and events on Twitter @energyathaas.
Suggested citation: Auffhammer, Maximilian, “More Boo In CO2,” Energy Institute Blog, UC Berkeley, September 19, 2022, https://energyathaas.wordpress.com/2022/09/19/more-boo-in-co2/
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Maximilian Auffhammer View All
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.
Energy Institute Blog 
Thanks for the interesting blog on an important subject. One thing to note, the Biden administration provided an interim update to the IWG estimates right after the election (the estimate of $52/ton at 3%). The previous Trump estimates only considered domestic damage and used a higher discount rate. The Biden update was challenged in court by Louisiana and nine other states. Other suits were also filed. See https://eelp.law.harvard.edu/2022/05/legal-challenges-to-president-bidens-social-cost-of-greenhouse-gases-estimates/. It’s hard to separate economics and politics in the US.
Max
Thanks for the summary of the paper. I saw this posted by RFF but didn’t have the time to delve into it. Your comments are right on.
I’m not a fan of probability-weighted forecasts–how can we put probabilities on such complex processes? Along your lines of fat-tailed outcomes, I would like to see much more focus on vulnerable outcomes and what we need to do to avoid those. Determining the costs associated with those scenarios are really the most important to focus on. So what if under one scenario climate change results in sunny days, rainy nights and bounty everywhere. We don’t own house insurance for the days that we live in that house carefree–we spend that money to compensate for the disasters.
Great post Max. This blog is useful and I appreciate all of the contributors’ work.
We cannot control what is outside our sphere of influence. What Brazil does with its rain forests or how China creates its electricity may be important, but it is not our major concern in our own lives. What is our own carbon footprint should be a personal concern for each person that reads this and other articles about CO2.
I decided to try and manage my little sphere of influence one item at a time and doing another every week to lessen my CO2 footprint. First, I reduced my usage of fossil fueled electricity by switching out incandescent light bulbs to CFL lamps and then finally to LED lamps in my home.
I then planted more broad-leaf evergreens like citrus and avocado trees that do absorb CO2 year around.
I then tried to drive less miles by making one trip a week with all the stops for shopping done in a milage conserving loop.
After doing the easy things, I installed Solar panels with batteries 800 watts each year for 10 years. Each year increasing my own generated energy and lowering my utility energy that is mostly fossil fuel at night but using my own batteries for the nighttime electricity.
Once I clean powered my normal electrical usage off-grid, I needed to replace my natural gas appliances with electric green powered appliances including the fan forded Natural Gas Furnas and hot water heater. I then installed a Tesla Solar Glass Roof to generate enough electricity to power my electric appliances replacing the natural Gas ones and giving excess clean energy back to the grid for my neighbors to use to replace some of their fossil fuels with my clean excess electricity. I found out that it takes me 16,000 watts of solar panels and 56 kilo watt hour of battery storage to be carbon neutral plus a lot of evergreen trees and bushes to finish the job.
Every single step, weather large or small, lowered my CO2 footprint and it was something I could do without spending a lot of time or money convincing others what they should do but rather what I could do. Enjoying fresh avocados and lower electrical and natural gas bills is just a side advantage to being green.
The SCC estimate of $52 per ton, in my opinion will not bring about the emission reduction required to combat global warming. Even the $185 global about may not achieve the aim. Though radical, as it may appear, an effective SCC should equate the shadow price of a zero emission backstop plant that generates firm energy and emits the equivalent of 1 ton of carbon dioxide. Certainly the cost of such a plant must be above the $185 cost be it photovoltaic solar or wind with battery storage or hydro power plant. That SCC estimate, irrespective of the model used would be effective. On the order hand, using regulation to ban emissions including what carbon trade allows would be effective even though it may drive the cost of energy higher. With LCOE rapidly declining an investigation in the cost of backstop technology suggestion is worth carrying out.
You have taken a significant step on the “long way toward elevating the level of public discourse concerning what to do about global warming”. This informs the discussions we should be having every day in every institution. Both my school (CSUS) and work are centered on this question, not in terms of a CBA approach but more in terms of what individual actions can be taken now. Thank you for shining a light on the critical work being done on climate change.