The final estimate for the cost of carbon emissions depends on a few more parameters.
The equilibrium climate sensitivity (ECS) is one of them. It is defined as the global average surface temperature change when doubling the CO2 in the atmosphere. After several discussions with the experts, the IWG came out with a distribution of ECS:
- median equal to 3 °C
- 67% probability that ECS is between 2 and 4.5 °C
- 0% probability that it is less than 0 °C or greater than 10 °C
If you like to know more about the distribution (a right-skewed distribution), read the paper by Roe and Baker (2007) published in science.
Now comes the famous discount rate. We have already discussed how an inappropriate value for the discount rate can throw a technology project out of the window. Government agencies typically use numbers between 3 and 7, whereas most climate literature chooses between 0 and 3. After considering all these, the IWG finalised three values at 2.5%, 3% and 5%.
Another value, and we will see what happens in 2016, is the choice between domestic SCC vs global. The team (2010) considered the US emissions a global externality, and the magnitude will reflect that. It was then reversed to a domestic problem in 2016 by the Trump administration, only to be brought back to “normal” by Biden. As per Wagner et al., a tonne of CO2 emitted in the US causes 85% of the damage abroad!
The results
All these parameters finally lead to a range of cost values for climate damage. Thousands of model runs finally resulted in the following values for the price (USD/ton CO2):
5th, 25th, 50th, 75th, and 95th percentile SCC values of -$9, $4, $14, $28, and $65, respectively.
Four point-estimates are selected for each year in the following manner.
- The central value: the average SCC of models at a 3% discount rate.
- The 2nd value: is the average SCC of models at a 2.5%
- The 3rd value: is the average SCC of models at a 5%
- The 4th: the 95th percentile 3%
| 2010 (USD/ton CO2) | 2025 (USD/ton CO2) | |
| Central (3%) | 21 | 30 |
| Second (2.5%) | 35 | 46 |
| Third (5%) | 5 | 10 |
| Fourth (95th percentile of 3%) | 65 | 90 |
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.
Roe, G. H.; Baker, M. B., Why Is Climate Sensitivity So Unpredictable?, Science, 2007, 318, 629.
Wagner et al., Eight priorities for calculating the social cost of carbon, Nature, 2021, 590, 549
