The Social Cost of Carbon with Economic and Climate Risks

How much is worth a ton of carbon?

The study The Social Cost of Carbon (SCC) with Economic and Climate Risks by Yongyang Cai, Kenneth L. Judd, and Thomas S. Lontzek aims to estimate the SCC by incorporating both economic and climate risks.

Traditional integrated assessment models often assume deterministic systems, which can lead to underestimations of the SCC.

The article shows how stochastic models can handle the complexity of incorporating multiple uncertainties in climate-economic models and concludes:

• Incorporating economic and climate risks significantly increases the estimated SCC: from $59 to $99 per ton of carbon for the year 2005, compared to the median value of $51/tC reported by the Interagency Working Group (IWG) in 2010.
• The SCC is not a fixed value but a stochastic process with substantial variation: the median SCC is projected to be $286 in 2100, with a 10% chance of exceeding $700 and a 1% chance of exceeding $1,200.
• Incorporating climate tipping points, such as the irreversible melting of ice sheets, introduces additional risks and uncertainties that significantly affect the SCC.
• Damages from tipping events should be discounted at a lower rate than those from temperature increases due to their lower covariance with short-term consumption fluctuations.
• The findings support the case for a significant carbon tax and suggest that current deterministic models underestimate the true SCC by not accounting for economic and climate risks.

Policymakers should consider the higher SCC estimates and the stochastic nature of the SCC when designing climate policies, emphasising the need for flexible and adaptive policy frameworks that can respond to new information and changing conditions.

The study may face criticism for its reliance on complex computational models, which may be difficult for policymakers and practitioners to interpret and apply.

Additionally, the focus on stochastic processes and tipping points could be seen as adding layers of uncertainty that complicate decision-making.

Critics might also argue that the wide range of SCC estimates could lead to policy paralysis, as stakeholders may struggle to agree on a specific value for carbon pricing.