Transcript Main title

Climate Risks and Carbon Prices:
Interpreting the Social Cost of Carbon
Frank Ackerman
19 October
2011
Climate science vs. economics
• Climate change in science
– Immediate response is needed
– Business as usual threatens lives, communities
• Climate change in economics
– Cost-benefit analysis is needed
– Important to ensure we don’t spend too much
• Both cannot be correct!
– A major effort to refute the science has failed
– Therefore, a new climate economics is needed
Valuing climate damages
• Cost-benefit analysis requires monetary prices for
everything of value
• Climate damages summarized in “social cost of carbon”
(SCC)
– Defined as present value of present and future damages from
emission of one more ton of CO2
– Depends on discount rate, modeling of future damages
• Larger SCC → stronger climate policy recommendation
• No active proposals to use as basis for carbon tax
The U.S. “social cost of carbon”
APPENDIX 15A. SOCIAL COST OF CARBON FOR REGULATORY IMPACT ANALYSIS
UNDER EXECUTIVE ORDER 12866
Interagency Working Group on Social Cost of Carbon,
United States Government
With participation by
Council of Economic Advisers
Council on Environmental Quality
Department of Agriculture
Department of Commerce
Department of Energy
Department of Transportation
Environmental Protection Agency
National Economic Council
Office of Energy and Climate Change
Office of Management and Budget
Office of Science and Technology Policy
Department of the Treasury
(No office, no address, no website, no publicity, no named authors)
The number: $21 per ton of CO2
• $21 / ton CO2 ≈ US $0.21 / gallon of gasoline
– Equivalent to 0.74 peso / liter
• The $21 estimate is an average of 15 results
– 5 emission scenarios, 3 models; constant 3% discount rate
• Emission scenarios from EMF-22
– Roughly comparable to IPCC’s B2 emissions
• Model averages
– PAGE: $30
DICE: $28
FUND: $6
• FUND estimates big net benefit in agriculture
– Based on very old research, now out of date
– Also contains a serious software bug (divide-by-zero error)
• Without FUND, average is $29
– Roughly 1 peso / liter of fuel
Mapping science to economics: 1
Scientific assessment
of damages
This mapping changes
the structure of
information
Economic assessment
of damages
$21/ton CO2
Mapping science to economics: 2
Scientific assessment
of damages
Economic assessment
of damages
Disastrously
high SCC
This mapping preserves
the structure of
information
Higher SCC
Low SCC ($21?)
Our re-analysis of SCC
• Use DICE model, as modified by Working Group for
US analysis of SCC
• Explore effects of four variations
1. Median vs. 95th percentile climate sensitivity (3.0 vs. 7.1)
2. Discount rate: 3.0% vs. 1.5% (close to Stern Review rate)
3. Low-temperature damages:
DICE default (low) vs. Hanemann estimate (4 x DICE)
4. High-temperature damages:
DICE default (low) vs. Weitzman estimate (disaster at 12oC)
Fraction of output lost to climate damages
Four damage functions
1
H-W
Weitzman:
50% loss at 6o,
99% loss at 12o
N-W
0.75
H-N
N-N
0.5
Hanemann
at 2.5o
0.25
Nordhaus
at 2.5o
DICE damage function: simple
extrapolation from lowtemperature damage estimate
0
0
2
4
6
8
Temperature increase ( oC)
10
12
Alternate SCC values, 2010
Social cost of carbon ($/tCO2), 2010
$1,000
$888
$893
$800
$622
$600
$481
$411
$400
$347
$264
$200
$0
$118
$56
$28
N-N
$200
$165
$96
H-N
$77
N-W
$232
$118
H-W
Damage functions
1.5%, 95th percentile
1.5%, average
3%, 95th percentile
3%, average
Alternate SCC values, 2050
Social cost of carbon ($/tCO2), 2050
$1,600
$1,550
$1,430
$1,200
$910
$800
$761
$150 - $500
$558
$400
$418
$198
$0
$534
$123
$64
N-N
1.5%, 95th percentile
$315
$202
$225
H-N
N-W
Damage functions
1.5%, average
3%, 95th percentile
$817
$509
$275
H-W
3%, average
Marginal cost of
maximum feasible
abatement scenarios
Costs of rapid abatement
• Inter-model comparison project (PIK, Germany)
– Five models: scenarios stabilizing at 400 ppm CO2 by 2100
– Marginal cost in 2050: $150 - $500 / ton CO2, average $260
• International Energy Agency “BLUE Map”
– Stabilization at 450 ppm CO2
– Marginal cost in 2050: $175 - $500 / ton
• Range of estimates reflects technology optimism / pessimism
• UK government guidance on long-term carbon prices
– Marginal abatement cost for a 2oC scenario
– Range of about $150 - $500 / ton in 2050
How close to infinity is close enough?
• Under many of our variants, the SCC exceeds the
marginal cost of maximum feasible abatement
– So anything reasonable passes a cost-benefit test
– Cost-benefit analysis becomes identical to precaution
• Weitzman: under plausible assumptions, the marginal
benefit of abatement is infinite
– Our analysis: under worst-case risks, SCC is so high that it has
the same implication as infinite cost
– Doubling worst-case SCC has no effect on policy
• Compare to: 2 *  = 
• Policy recommendation: reduce emissions as fast as
feasible
[email protected]
http://www.sei-us.org/ClimateEconomics
Stockholm Environment
Institute - US Center
Tufts University
Somerville MA
USA
Our study of the SCC:
http://www.economics-ejournal.org/economics/discussionpapers/2011-40
- or Google “Ackerman e-journal SCC”