Environmental Economics

Here is a good summary of the NAS report from the Washington Post:

How we view the costs of future climate change, and more importantly how we quantify them, may soon be changing. A much-anticipated new report, just released by the National Academy of Sciences, recommends major updates to a federal metric known as the “social cost of carbon” — and its suggestions could help address a growing scientific concern that we’re underestimating the damages global warming will cause.

The social cost of carbon is an Obama-era metric first addressed by a federal working group in 2009. The basic premise is simple: Scientists agree that climate change will have all kinds of impacts on human societies, including natural disasters and effects on human health, productivity and agricultural output, all of which have economic consequences.

The social cost of carbon, then, refers to the monetary cost of emitting a single ton of carbon dioxide into the atmosphere, given that these emissions will further contribute to global warming. The value has been used to aid in cost-benefit analyses for a variety of federal environmental rules. Currently, it’s set at about $36 per ton of carbon dioxide.

But the new NAS report, requested by the federal Interagency Working Group on the Social Cost of Carbon, suggests the methodology used to arrive at this value is in need of updating, both to make it more transparent and more scientifically sound. …

The method developed by the original federal working group relies on a set of three models which translate current carbon emissions into future temperature increases, factor in the damages that may be caused by the resulting climatic changes in the future and then translate these damages into dollars. The method also applies a discount rate to account for the fact that these damages will occur in the future, rather than right away — the discount rate can be thought of as a kind of interest rate addressing how much the future generation is willing to pay now to avoid climate consequences in the future.

The new report recommends a new framework that unbundles the various steps of the calculation process and addresses them in separate modules, all of which feed into and inform each other. The report suggests that, over the next two-to-three years, these modules be shaped to rely on the most relevant and up-to-date science in each area — and it also suggests that estimates of the social cost of carbon be updated every five years.

These recommendations address a growing concern in the scientific community that our increasing scientific understanding of the consequences of climate change isn’t adequately represented in the current methodology. In fact, climate scientists and economists alike have begun to argue that the current models may actually be underestimating the social cost of carbon. …

There are several major ways the new report’s recommendations could cause this to happen, said Richard Revesz, a law professor and dean emeritus of the New York University School of Law, who also served as a reviewer on the new report. For one thing, accounting for certain climate damages that were omitted in the older models could drive the value up, he said.

A second factor involves the report’s approach to the use of discounting. When calculating the social cost of carbon, applying a higher discount rate causes the cost to decrease, and vice versa. Critics who favor a lower social cost of carbon have sometimes argued that the current discount rate used by the federal government — 3 percent, in most cases — is too low. …

Revesz added that the current estimate of the social cost of carbon is a global estimate — that is, it applies to the entire world, not just the United States. Some critics have argued for a U.S.-specific estimate in the future, which would be a smaller value than the global estimate. This argument is also addressed in the new report, which recognizes the many uncertainties and difficulties that would be associated with making such an estimate.

The article also addresses the political implications. My translation of this part is that the benefits of addressing climate change will soon be considered zero as with other government regulations. 

You can get the page proofs for free here: https://www.nap.edu/catalog/24651/valuing-climate-changes-updating-estimation-of-the-social-cost-of.