The Social Cost of Carbon (SCC) is the monetised cost of damages of the incremental increase in CO2 emissions. Remember the cost-benefit-risk triangle? Such calculations enable administrations to take a cost-benefit approach in deciding on any investments for emissions reduction. The interagency working group (IWG) provided the required study for the US using what is known as the integrated assessment models (IAM), and we will see how they developed SCC estimation.
To simplify, IAM provides the missing link between the physics and economics of climate change. To further break it down, IAM includes four key relationships, viz. future emissions of greenhouse gases (GHG), the effect of GHG on the climate, the impact of climate changes on the environment and finally, the connection between the environmental hit and economic damages. IWG used three models: the Dynamic Integrated Climate and Economy (DICE), the Policy Analysis of the Greenhouse Effect (PAGE), and the Climate Framework for Uncertainty, Negotiation, and Distribution (FUND).
These are commonly used models by scholars and in the Intergovernmental Panel on Climate Change (IPCC) reports. While they are all different in their details, they model emissions to concentrations, concentrations to temperature changes, and temperature changes to monetary damages. For example, the FUND model evaluates damages to agriculture, forestry, water, energy, sea level, ecosystems, human health, and extreme weather. On the other hand, the DICE model does it for agriculture, coastal areas, energy use, human health, outdoor recreation, and human settlements and ecosystems.
We already know that many of these are not exact physics and economics. And the model output depends on the assumptions used. Therefore, several probabilistic scenarios results from these models and the outcomes require incorporating all of them, thus resulting in a distribution of costs.
IWG estimated the SCC on five trajectories adopted by the Stanford Energy Modeling Forum exercise, EMF-22. The first four are Business-as-usual (BAU) CO2 concentrations (612, 794 and 889 ppm in 2100). The fifth one stabilises at 550 ppm CO2equivalent. More parameters (annual CO2 emissions, per capita GDP, populations) of those scenarios are in the following tables.
| EMF-22 Scenario | 2000 | 2050 | 2100 |
| IMAGE | 26.6 | 45.3 | 60.1 |
| MERGE | 24.6 | 66.5 | 117.9 |
| MESSAGE | 26.8 | 43.5 | 42.7 |
| MiniCAM | 26.5 | 57.8 | 80.5 |
| 550 ppm | 26.2 | 20.0 | 12.8 |
| EMF-22 Scenario | 2000 | 2050 | 2100 |
| IMAGE | 6,328 | 17,367 | 43,582 |
| MERGE | 6,050 | 13,633 | 27,629 |
| MESSAGE | 6,246 | 16,351 | 32,202 |
| MiniCAM | 6,017 | 14,284 | 42,471 |
| 550 ppm | 6,082 | 15,793 | 37,132 |
| EMF-22 Scenario | 2000 | 2050 | 2100 |
| IMAGE | 6.1 | 9.0 | 9.1 |
| MERGE | 6.0 | 9.0 | 9.7 |
| MESSAGE | 6.1 | 9.4 | 10.4 |
| MiniCAM | 6.0 | 8.8 | 8.7 |
| 550 ppm | 6.1 | 8.7 | 9.1 |
That leaves two important parameters before reaching a price for today’s carbon – discount rate and domestic contribution (in this case, the US). We will see them next.
Reference
Greenstone, M., E. Kopits, and A. Wolverton. “Developing a Social Cost of Carbon for US Regulatory Analysis: A Methodology and Interpretation.” Review of Environmental Economics and Policy 7, no. 1 (January 1, 2013): 23–46.
