In 2010, 12 government agencies working in conjunction with economists, lawyers and scientists, agreed to work out what they considered a coherent standard for establishing the social cost of carbon. The idea was that, in calculating the costs and benefits of pending policies and regulations, the Department of Transportation could not assume that a ton of emitted carbon dioxide imposed a $2 cost on society while the Environmental Protection Agency plugged 10 times that amount into its equations.
Instead, they decided, all of the agencies would use the same baseline of $21 per ton as the standard in monetizing the social costs of the seven-plus billion tons of carbon generated by American power plants, vehicles and factories each year.
But a new paper published in the Journal of Environmental Studies and Sciences concludes that the costs of carbon pollution and related climate change are vastly greater — possibly two to 12 times as much. The problem, the authors argue, is that the federal government is not adequately taking into account the impacts of climate change on future generations.
At the heart of this debate is a disagreement about how to apply an economic concept known as the discount rate to the impacts of climate change. Simply put, the rate is based on how much it is worth to us now to prevent that future damage. Given that people are more concerned about having money now, economists posit that we are willing to spend less than a dollar today to prevent a dollar’s worth of damage in a year, or two years, or a generation.
A bird in the hand today is worth more than a bird in the hand tomorrow. Or perhaps two birds in the hand next week — it all depends on the discount rate. Or, if you will, the discount rate helps to explain why a new college graduate borrows money from their anticipated future salary to live on while they are working their way up and why it’s so hard for people to forgo eating a doughnut today in the hope of losing five pounds by the end of the month.
The interagency group looked at discount rates of 2.5, 3 and 5 percent, ultimately settling on 3 percent and putting the cost of one ton of carbon at $21. But the new study opts for discount rates of 1, 1.5 and 2 percent, ultimately putting the cost of one ton of carbon at anywhere from $55 to $266.
The research was carried out by Laurie Johnson, chief economist in the climate and clean air program at the Natural Resources Defense Council and Chris Hope of the University of Cambridge’s Judge Business School.
Some economists have justified using higher discount rates because they expect that people in the future will have relatively more money and so be less affected by the damages. Every dollar spent mitigating climate change is also a dollar that cannot be invested in something else which could potentially have much higher returns in the future, they argue.
But Dr. Johnson contends that the discount rate needs to be lower because climate change has the potential to severely disrupt projected economic growth. Even if income does rise over all, the people most harmed by climate change may not be experiencing the same rate of economic growth — a factor that she says bears significant consideration. And carbon pollution has a host of “external” negative impacts like public health damage that she says must also be factored in.
“Looking at discount rates for climate change is especially tricky because unlike other situations, the people benefiting from current consumption are not the same people, not even the same generation or nationality, as those who will be most harmed,” Dr. Johnson said in an interview.
Update: See my comments here. Or not.