Discounting the SCC: “Wait, this isn’t a sale!”
By: Ashley Brinkman MS ’15 and Anna McKeigue MS ‘15
This week’s National Climate Seminar at the Bard Center for Environmental Policy focused on the social cost of carbon (SCC). The guest speaker, Laurie Johnson of the National Resource Defense Council, asked the provocative question: “What is the present value of future economic damages caused by one ton of carbon emissions today?”
The SCC is an important policy tool that has been advocated as a minimum value for a carbon tax. Essentially, the SCC allows economists to monetize climate impacts from temperature change based on market proxies for different climate outcomes. The monetization of climate impacts can be discounted at whatever rate is fit for policy goals.
However, as Johnson explained, the model to calculate current SCC leaves out the most extreme climate change factors that we observe today. The model currently includes agricultural output, property loss due to sea-level rise, changes in the demand for energy and public health incidents. Although the value of the SCC has gone up—the previous value of $21 per metric ton of carbon emission is now set at $32 by the EPA in order to better reflect the real impacts of climate change—it remains a conservative estimate.
Through our discussion with Johnson about the SCC and discount rates, we began to get a sense of what the substance is behind this number that, as she points out, causes the sleeping giants to wake up.
Discounting is an interest rate in reverse. The basic principle behind this idea is that money in the future is worth less to a person than money right now.
We currently have plenty of established market-based discount rates, but how do you place a value on future benefits or damage caused by the environment? U.S. courts have determined that the cost of emitting CO2 into the atmosphere is not zero. So, then what is the cost?
Consensus has emerged among climate economists that the discount rate should be a declining discount rate. This type of discount rate becomes a smaller and smaller percentage as time goes on so that things far in the future are valued at a higher, and arguably more appropriate, value; like the damage that could be caused by a ton of CO2 emitted into the atmosphere. A declining discount rate in economic calculations allows for the consideration of future generations instead of just our own. Economists adjust the discount rate in this way in order to reflect the increase of uncertainty with the passage of time and as Johnson puts it “we can’t discount things in the future just because we prefer things now.”
The catch: what is the starting rate? After much deliberation among all the participating U.S. agencies, American policymakers have chosen to go with the most widely published value of 3%.
An Assumption (That Matters Just as Much as the Discount Rate)
When calculating the discount rate, economists currently assume that economic growth will continue as it has in the past; steadily upwards. Johnson, however, points out that past growth has been in relatively similar climate conditions, so societies have grown to be productive based on the specific ecosystem they inhabit.
As climates begin to change, many societies may lose their natural capital and, therefore, their economies would not be as productive. With little grasp on what impacts on productivity could arise from global climate change, the continued growth of economies cannot be assumed.
Consideration for the Future
Thinking about this mysterious number, where it came from, and its ability to advance the discussion and decision-making on climate change is a good start and the right conversation. As continuing research contributes to our knowledge base, we can hope that some of the current contention and controversy surrounding the issue will dissipate. Perhaps then we can work towards a consensus on climate action that incorporates an intergenerational discount rate in the climate context. Johnson has found, through her research and the supporting literature that, apart from addressing climate change, efforts to mitigate climate change through energy production alternatives generate many economic benefits. In her opinion, “We are better safe than sorry.”