You have seen the destroyed value if society lets the market operate at equilibrium (maintaining the status quo). The role of governments is to implement mechanisms to move the balance towards a value that reflects the cost of climate change. It could be efficiency mandates, taxes, incentives etc.
But those are solutions or policy decisions. The question we address today is how to calculate the social cost. An example of a metric is the monetary value of all the future damages incurred globally by one additional tonne of CO2 emitted. Based on this, a price per tonne of CO2 ejected today is established by applying a discount factor.
What is a discounting factor, and how much should it be? We have seen it before: it is a way of assessing the present value of a future amount of money.
Present value = Future Value x (1 + discount rate)number of years.
Ask this simple question: how much are you willing to pay for a $100 benefit 50 years from now? It depends on the discount rate used, and the following table provides how it changes.
| Discount rate (%) | Future Benefit ($) | Price to Pay now ($) |
| 7 | 100 | 3.4 |
| 5 | 100 | 8.7 |
| 3 | 100 | 23 |
| 2 | 100 | 37 |
| 1 | 100 | 61 |
So, at 7%, you are practically willing to pay nothing ($3.4). So you discounted the future so much as the value is so distant for you. At 2% or so, you are getting something that enables you to invest serious money.
Politics of emission
Although climate science and economic models do help the cause, at the end of the day, setting a carbon price is a political decision. An example is how the United States did the cost-benefit analysis and reached a monetary value for CO2 emissions.
In 2010 the Obama administration constituted an Interagency Working Group (IWG) of climate scientists and economists to calculate the social cost of carbon. Through its revisions in 2013 and 2016, the leadership has set a price of about $50/tonne of CO2. The subsequent Trump administration revised the value in 2018 to $7, which later changed back to 50 by Biden!
Trump administration managed a smaller number for the SCC by limiting themselves to the (cost of harm in) US, whereas every US tonne of CO2 costs 85% of damages abroad.
How scientists and economists could create a social cost is up next.
